Lorenzo Lorenzotti - ACG Private Equity

What are you looking to invest in? Where are you positioned?

We have just started raising our fifth fund-of-funds with a EUR250m target. We will opportunistically look to invest in small mid-market buyout funds, growth capital funds and special situations. We have a pan-European scope including CEE. We continuously monitor about 1,500 funds throughout Europe. Around 250 funds fit our strategies, of those we screen between 30-50 funds that are fundraising over the course of the investment period. We then allocate between EUR10-25m per investment in 14-17 funds. This, in our opinion, provides us with the lowest level risk for maximum returns. We also have a mezzanine debt fund which we believe is in a sector generating much interest due to the current debt crisis.

What are the most important aspects when investing in GPs?

Relationships are of paramount importance, this is a people business. You have to know and trust the people you invest with, you have to be sure they have created an excellent local or regional network over the years, created trust and a solid reputation among the local entrepreneurs and banks, for this is what builds a proprietary deal flow. The managers also have to want to prove themselves to their peers, they need to be hungry for success and results, you have to know they are behind what they are doing 100%.

As a pan-European investor it is imperative for us to have a multilingual team who are able to be on the ground and be knowledgeable about the particular region in which we are looking to invest, in order to generate and maintain these relationships. Only through this hands-on, face-to-face rapport can you truly understand where and with whom you are investing, thus minimising risk. We look to invest in people and teams with self belief and a demonstrable ability to repeatedly make money for their investors and themselves, in up cycles and down cycles. Any show of confidence on their part is reassuring and attractive to us. If managers invest large amounts in their own funds, it represents the kind of commitment we seek. We want established people, with good track records, even first time funds if we know members of the team well from previously. We don't want to invest with someone who starts off investing in one thing and then switches to another. That is the kind of action which will have LPs sweating and spook investors in the future.

Have relationships changed of late?

LP/GP relationships have indeed changed recently in favour of the LPs. However, I feel that on the whole LPs sympathise with the difficulties that might arise in the current economic situation since they too are also feeling the pressure. A number of issues can still arise which may test LP/GP relationships. For example, it can become an issue if an LP has to continue to pay management fees when no investments are being made by the GP. The way to get through this is through dialog with the hope of reaching compromise between the two parties. If a well established fund doesn't invest for a year or more for whatever reason, it could be a good gesture and a great sign of professionalism to waive or reduce the management fee. Of course it would be unreasonable to expect this of younger GPs who are heavily dependant on management fees to pay basic expenses but that does not mean LPs simply wait. If a GP doesn't invest for a year or two and provides a viable explanation we as investors are usually supportive and accepting. We have seen GPs not invest for two years and then do extremely well.

Clearly, today the leverage is on the LP side and we should use it in order to recalibrate certain situations where the alignment of interests had been altered. Pressure should be placed on very mature GPs who still command high management fees for a new fund when they are still making very good fees from the various prior funds. The interest for GP teams should always be on the carry, not the fees. That is the basis for the private equity model, and it is what makes it efficient.

Where do the best opportunities in private equity lie?

The pipeline of opportunities for special situations is growing every month, and should continue as difficult situations for certain companies, be they debt or equity, become worse, or where institutions shed non-core assets or investments. Growth capital and small buyouts continue to be very attractive, as these strategies represent one of the few sources of capital in the market today and likely for some time to come.

While it's also been hit by the credit crunch, we still believe there is selective potential in the CEE region. Although bigger funds will find it difficult to find the kind of transaction they are after in the region, smaller hands-on players will thrive. Wladimir Mollof, the founding partner of ACG is Bulgarian, which has helped us develop a number of important contacts locally and to learn how to approach the region and each individual country. Private equity is still in the early stages of penetration and maturity in these markets and we feel it is a good time for us to establish ourselves in the region.

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• GPs
• France