LP Profile: HQ Capital

Founded 30 years ago, Frankfurt-headquartered HQ Capital is a global firm with offices in South Korea, Japan, China, the US and the UK. The organisation raises funds-of-funds, and also manages separate accounts on behalf of its clients.

HQ seeks to source global private equity opportunities, but ensures that it allocates 20% of its European portfolio to Germany, typically through commitments to German GPs, but also to other pan-European managers that invest in the DACH region.

"We have a very special situation that we find in Germany," says HQ managing director Britta Lindhorst. "The market is bifurcated, the large transactions are done by pan-European and global managers, while the German managers are the leading power in the mid-cap deals."

Explaining that this happens because pure German managers with funds over $1bn are very rare, Lindhorst highlights that German managers still have an advantage, as mid-market companies, family offices and founder-owned companies are keen to talk to local managers, rather than firms from abroad.

"Pure mid-market German GPs have the possibility and opportunity to stay away from the heavily auctioned transactions and opt for one-to-one and proprietary situations with family-owned businesses," says Lindhorst. "However, the disadvantage is that it takes much longer to convince a family or an owner to sell a business that they have owned for decades, and this is why we see the investment pace of some German GPs being relatively slow."

The German market is export orientated, which makes it extremely cyclical with regards to certain industries such as the automotive sector, according to Lindhorst. As a result, she says that some international investors may be cautious about investing in Germany in 2020, but HQ has a long-term view when investing, and this can be a competitive advantage for investors who understand the market and invest for the long term.

HQ has invested in 530 private equity funds across 266 managers since 1989. Since 1992, it has completed 192 secondary transactions representing $2.3bn in committed capital (as of Q3 2019). The private equity portfolio consists of 60% primaries, 30% secondary investments, and 10% co-investments.

Second thoughts
As part of its fund-of-funds, HQ invests in secondaries, especially in the early phase of the investment period to mitigate the J-curve. It tends to invest with GPs on the smaller side of the market, buying smaller pieces and avoiding the big auctions run by secondaries intermediaries.

The geographic split of its private equity portfolio is 50% North America, 30% western Europe, with the remainder invested in Asia, among other areas. The organisation has recently appointed Motoya Kitamura from the secondary investment manager AB Value Capital Partners to serve as managing director, based in Hong Kong and Tokyo.

The organisation has $7.3bn in private equity assets under management and is planning to commit $500-600m to private equity over 2020. Lindhorst is planning to back some of the new funds that its existing managers, including its German GPs, are planning to launch in 2020.

Moreover, when looking for a new manager, HQ is searching for a good track record and consistent investment strategy. It also looks for co-investment opportunities, but this is not a must-have. The organisation is also looking for managers that embrace environmental, social and governance (ESG) criteria.

As for the fundraising environment in the other DACH countries, Lindhorst says Austria does not play a real role anymore, and also Switzerland is a relatively small market. However, Lindhorst adds that some larger Swiss GPs have started to roll out their strategies into Germany and northern Italy, such as Capvis Equity Partners.

When investing in funds, HQ Capital tends to allocate $20m on average, but may also make significantly higher commitments.

HQ, a signatory of the United Nations' principles for responsible investing (PRI), has integrated an ESG and sustainable policy in its investment process since 2013. It is also looking to build a dedicated sustainability programme. Says Lindhorst: "We want to build a programme with managers that have a very clear and precise strategy of ESG and sustainability for their organisations and portfolio companies. We want to find managers with which we can also help make an impact on the companies." 

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