Institutional Investor Profile: Hans van Swaay, Partner, Lyrique

Lyrique is a private equity boutique involved in all stages of private equity, ranging from early stage venture capital to late stage buy-outs and restructuring. The firm makes both direct and fund investments. Fund investments (and co-investments) are made worldwide, whereas small, direct investments are made in and around Switzerland.

Hans van Swaay created Pictet & Cie's highly successful private equity program, after he had been a managing director with UBS' private equity activities. He has made fund investments worldwide and direct investments in Switzerland, Germany, France, the UK and the Netherlands.

Why did you start investing into private equity funds?

'It was a logical next step, after what we created at Pictet. In establishing Lyrique last year, we decided that we wanted to do something for ourselves and create a high quality, private equity boutique, which would contrast with the big asset gatherers. We wanted to target quality rather than quantity.

As Switzerland is a very small market for direct investments, but a large market for fund investments, we felt the combination made sense, also because our team comes from both the direct and from the indirect side. We combine investments in top quality funds with direct investments in small niche areas with little competition. Smaller, direct teams in private equity can become very local and lose touch with the rest of the industry. We want to keep seeing what the best groups in the world are doing and learn from them.'

How much capital do you have on the fund of funds side?

'Several hundred million Euros and even though we want to remain relatively small, this is growing and we do want to become larger than we are now.'

What kind of investments do you look for?

'On the fund side we focus mainly on the US and on Western Europe. Currently we are looking mostly at buy-out, restructuring, special situations and real estate funds. We are also starting to spend more time on secondary transactions of such funds. In all cases we are keen on co-investments. On the direct side it is succession situations, transactions with a life sciences angle in buy-outs and in growth financings. We are now also starting to look at restructurings.'

What is your typical investment size?

'For fund investments we take ticket sizes between € 5m and €20m. For direct investments paradoxically this is much larger right now, as we are working alongside some large, direct investors on sizeable transactions that we have sourced. The idea is to do primarily investments with an enterprise value below €100m.'

How do you hear about good investment opportunities?

'The moment people know you have money to invest, they come knocking on your door. That is the easy part and in my view not something you want to rely on too much. You should be proactive. Looking back, the best fund investments we have done are with teams we have sought out. How do you hear about them? By having your ear close to the ground, by following gossip and by meeting with many people.'

Tell me more about your investment process.

'I do not think we do things fundamentally differently from other investors. Nearly everybody has this funnel with many opportunities going in at the one end and few coming out at the other. Then they chop it up in three or four phases, which they give fancy names, and that is it. Each next phase has fewer potential funds or deals and in each phase you do more work per fund or per deal. Direct and indirect investing is a matter of saying "no" a lot. We are trying to say "no" quickly to save everybody aggravation and time.

The private equity fundraising process is already ridiculously inefficient, sometimes lasting two years, and LPs should not make it worse by being arrogant or slow. Often you know very quickly that you are not going to do something, so why not say it?

I once asked one of the founders of what is now one of the largest buy-out groups in the world, what made them so successful. He said that the main reason was probably that they had managed to spend much time on investments they wanted to do and had lost little time on the ones they did not want. That is our ideal too.'

What do you look for in a manager?

'We look for proof that he has been a successful investor. It sounds very obvious, and it is. It is totally irrelevant to say that you have combined private equity experience of 150 years. If all these 150 private equity years made great returns, then fantastic, if the manager in question lost a lot money, it is not.

People who have made great returns for their investors over the last ten years are worth investing in. Private equity past performance is a fairly good indicator of future performance. It does not have to be the same organisation; it could be a spin-off from another group.'

Do you invest in first-time funds?

'We do. We look for good people who have proven themselves in other settings and who have made successful investments.'

Do you invest in emerging markets?

'For successful exits you need markets that work well. This applies to venture capital and to buy-outs. You want an efficient process. I think in the end the most sophisticated financial markets have produced the best private equity. People are clearly looking at emerging markets more as they grow, Asia especially. Asia has seen some great deals and I am sure there will be more, but I do not think you necessarily need high market growth to get great private equity returns. Again, I think you need sophisticated financial markets to do that.

I am not a great fan of investing a high percentage in emerging markets. I think, on average, the returns compared to the risk are actually not that great. I have always said that we were not paid to be brave. Another issue is that most institutions or people do not have the huge amount of money you need to successfully apply these much diversified strategies. To have an Asian strategy you must invest meaningful amounts and have vintage diversification, geographical diversification within Asia and manager diversification. All this on top of what you do in North America, Western Europe and now maybe even Eastern Europe. That is a lot of money for a lot of different funds.'

How would you advise a new private equity investor?

'I would tell them not to do direct investments. It is a common mistake that people make when they suddenly have money to invest in private equity. It is usually a disaster; asset managers are hardly ever good, direct private equity investors.

The next point is slightly self-serving, but I would go to a small specialist, rather than what I call "asset gatherers". Like the rest of the financial industry, private equity is increasingly becoming a product pusher, which is not good for investor returns. This is becoming an issue in the private equity industry. I think asset gathering is a totally valid strategy if you are an asset manager, but it is not always in the best interest of an investor (who is new to private equity). The choice of funds of funds or directly investing in funds is a question of size. Funds of funds are more cost-efficient for smaller investors, but make no sense for larger investors, who should invest directly in funds.'

How has the recent crisis affected private equity?

'As I said, truly good private equity has previously been done in sophisticated financial markets. These sophisticated financial markets have just taken a phenomenal hit and therefore private equity is also hit badly. There is a bit of a lag effect in terms of valuations and reporting, but this industry is highly correlated with other markets and therefore far from immune from what made other financial sectors so ill. The 2006 and 2007 vintages will not look good and prices have generally not dropped far enough for true bottom fishing. So there is a now a phase of damage limitation in terms of existing investments and reputation and there is little investing being done.'

What does the future hold for private equity?

'First we have to get through this current financial mess. This is not going to be easy and it is going to take some time. Clearly it will slow down new investments enormously. However, long term I think private equity will grow even bigger. Currently private equity represents less than 20 per cent of the world's M&A transactions and I can think of many good reasons why this could be more.

About a year and a half ago I predicted that there would be bigger buy-out funds to come, and I still think so. I think private equity is starting to mature. I think we will see some of the very big players get bigger still. There are about ten who are worldwide players, who will dominate that side of the market. I think we will also see increasing specialisation. This can be size, geography, industry specialisation or any other relevant angle. I think the plain vanilla players in the middle will increasingly suffer.

Lots of second-hand buy-outs have been done, well over 30 per cent of all buy-out transactions are now between two buy-out firms, and I believe they are going to show low returns. This is not what investors in buy-out funds are looking for.

At the lower end there will be lots of interesting niche strategies that could be very successful. We found that small funds are very attractive and that to get a true picture you must strip out the first-time funds. First-time funds are on average small, but on average they are also fairly poor performers. However, the small groups that decide to stay small tend to generate good results.

Today strategies do not matter that much, the quality of the people does. In the future good groups will increasingly start to differentiate themselves, as in any maturing industry.'

What is the biggest issue facing the industry currently?

'I would say the huge overhang of uninvested money. Surprisingly people have kept on raising large amounts of money. The actual investments, however, have slowed down enormously, so the overhang has grown and there is no sign of anyone giving back money to investors.

I think this is an interesting issue and nobody is talking about it because, of course, all want to keep raising more money. Probably in a world that sorely lacks liquidity, the industry is going to find a way to put it to work in special situations, restructurings and partnering with trade groups. This is different and it will be interesting to see who adapts to this new world fastest. Valuations will become more attractive, but for the moment there will be little leverage.

Because of how this industry is structured there is nearly always a mismatch between the supply and demand of funds and deals. Today there is much more money than there are deals, but the buy-out industry has so far always found a way to put their money too work intelligently and I think it will again.'

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