LP Profile: Lennertz & Co gears up for new tech impact venture fund-of-funds

The vehicle is set to launch sometime this year and will invest in a combination of managers investing in early stage moonshots, growth and later stage transactions, as well as private equity funds. Tiedt would not disclose the fund’s target but said that it will fall somewhere in between the firm’s typical fund-of-funds range of EUR 50m and EUR 100m.

It will target GPs that engage in three areas of impact investing: climate change; “communities”, an investment theme addressing all core aspects of human life; and industrial technology. The latter would entail tech investments in industries generating large shares of CO2 emissions, such as steel production and transportation, Tiedt said.

For its communities theme, the firm is considering managers with portfolios across several areas, including food technology, specifically developments around fermentation, said Tiedt. It will also target technology innovation centred around construction and building management, as well as a broader focus on access to services, particularly education.

“Impact investing is a difficult space and we’re very careful when it comes to fund selection because ESG investing differs from impact investing,” she said, noting that KPIs are a good starting point to determine what the funds actually measure. Although it is relatively straightforward to look at CO2 reduction or carbon removal data when it comes to climate change and industrial tech, with issues like healthcare or communities it is more challenging to measure and monitor. The firm is keen to see “real impact and real change, as opposed to marginal improvements,” she added.

The new fund will target GPs globally, largely across Europe and the US, but Lennertz has had talks with a couple of managers in emerging markets, including India, said Tiedt. Within Europe, the firm will consider several funds in Scandinavia, as well as managers in Germany and France, with a “fair amount” of interest in funds emerging in southern Europe.

Lennertz will follow the capital raising strategy of its predecessor funds and will engage in external fundraising, as well as committing capital over a two-year period on average, said Tiedt. Should the process kick off in the summer, the fund will stay open for about a year, she added.

The firm usually aims for 20% gross IRR, with the DPI (distribution to paid-in capital) of its first private equity fund-of-funds, which launched five years ago, currently standing at 0.8x, she said.

Emphasis on quality
The firm is largely sitting on a young portfolio and is not under much pressure to deliver exits, said Tiedt, although its funds are gradually beginning to realise some of their investments. This is not the case for venture, she added. As a result of the tough exit environment, she expects to see more of GP-led structured processes and continuation funds as managers are looking to provide liquidity to their LPs.

At the same time, investors are shifting towards quality when it comes to their capital allocation decisions, seeking high-quality funds that have performed through the cycles. As a result, some funds will get smaller, while some might exit the market completely, she said. “I expect that to happen for a couple of years and then we will go into a similar cycle to what we saw in 2008, where professionals are spinning out from the existing funds and setting up new ones, mostly in the small-cap and mid-cap segment, to fill this gap,” she said. “The environment where a USD 1bn fund was considered small-cap is not healthy.”

Amid current market conditions, GPs are starting to provide various incentives to attract LPs, such as fee deductions, co-investments without fees, and “all kinds of tools to get people to commit and commit quickly,” she added. However, Tiedt believes the environment is more representative of a healthy economic cycle, compared with the unusual pandemic years, and both GPs and LPs have to decide whether they will slow down and how they should be executing deals.

Some of Lennertz’s LPs, most of whom are entrepreneurial families, have recognised that this is a much more attractive investing environment and continue to invest, she said. Others are now focusing on managing their businesses and are making investment decisions depending on their capital needs.

Small- and mid-cap focus
Aside from its upcoming tech impact venture fund of funds strategy launch, the firm is continuing the deployment of its third Europe Private Equity fund-of-funds. Lennertz launched the fund May 2022 and has since made commitments to three funds, as well as two co-investments, she said.

The vehicle will remain open throughout this year, she said. The firm chose to prolong the final close of the fund slightly, she added, given that there are “a couple” of funds that are currently fundraising that it would like to commit to.

The sweet spot for Lennertz’s third private equity-focused fund-of-funds lies in the small-cap and mid-market space, where funds tend to do multi-faceted transactions, compared with the very prominent and more standard deals of large-cap funds, she said. At the moment, the firm is looking at some very small-cap deals in Europe.

"Mid-cap private equity funds are more attractive to us on many levels," she said. "They have more flexibility with exits, as they are also able to sell to larger funds, and are managed by personalities that are very relatable to the entrepreneurial families we work with."

Allocating capital to smaller GPs also allows the firm to differentiate its offering compared with that of the larger PE fund-of-funds, that have a big portion of their capital allocated to very well-known, large firms, she said.

Apart from private equity, Lennertz also backs venture capital funds in Europe and the US, including the blockchain venture space. In the European venture and growth segment in particular, it is among the few firms providing to its family LPs access to prominent US venture funds, such as Kleiner Perkins, Bessemer and Lightspeed Venture Partners, she said.

“We want to give our investors within the space an opportunity to generate value, which in my opinion it's only possible with smaller, focussed portfolios that are faster invested and faster to exit,” she said.

The firm is also managing several strategies via its single funds and makes co-investments alongside its own funds, as well as within fund-of-funds. It is investing directly in the health insurance market, for instance.

While the firm will be expanding its impact investing capabilities with its new fund-of-funds, it has already invested in Rimac, a Croatia-based developer and manufacturer of electric hypercars and battery systems, via its current private equity fund-of-funds. This deal would qualify as impact, she said.

Women leaders
Tiedt joined Lennertz in 2017 after several investment roles across the industry, including six years at Bain Capital.

She recognises the progress achieved when it comes to women’s presence in leadership roles, although there is room for improvement. “I believe women can provide a completely different perspective on deals and I would like to see more women having a seat at the table,” she said.

While she believes that women have been selecting themselves out of the industry, more active organisational support means that women have a bigger presence in operational and management roles. Lennertz is almost at parity in terms of the number of women and men across its teams, she said.

Overall, Lennertz has deployed USD 850m over six years in commitments to alternatives and illiquids, said Tiedt.

[Editor's note: The article has been amended post publication to clarify that Lennertz & Co is launching a technology impact venture fund of funds strategy.]

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