Q & A

Rune Holen (RH) investment director, Storebrand Alternative Investments ASA

Joachim Hoegh-Krohn (JHK) CEO, Argentum

Jan Terje Aasgaard (JTA) head of private equity DnB Nor Asset Management

How do you construct your portfolio?

- RH: When we determine our annual allocations we have an internal macro discussion on the asset class where outlook, M&A activity, capital available and deal pipeline are discussed to set the guidelines for considering new commitments to regions and segments. We seek to appoint managers with proven ability to use their discretion to allocate capital effectively to create a balanced portfolio. In our case we focus on the larger decisions; like the decision to start investing in emerging markets three years ago.

- JTA: Currently we invest about 30% into Nordic funds, 35% into US-based funds and 35% into European funds. We seek to commit 70-80% to buyout and 20-30% to venture. We also hope to broaden our investment scope to include up to 10% in emerging markets, mainly in buyout funds.

As we speak, we are in the process of restructuring our private equity activities, and during 2008 we aim to raise two funds-of-funds; one focused on the Nordic region and one international fund, all depending on investor appetite. We have NOK 1.2m (for both funds) and we also seek to attract third-party capital.

- JHK: We invest only in Nordic private equity. We do not seek to balance the portfolio by categories but focus on selecting individual funds based on team quality, strategy and track record. However, when considering a fund's strategy we also review market opportunities. We apply rigorous risk measurement and management due diligence which, of course, has implications on our portfolio.

How do you determine your asset allocation? And do you see this changing due to the credit crisis?

- RH: We are not shifting very much, but we are seeking less venture and growth funds this year and investing more in turn-around and/or distressed funds.

- JTA: We will stick to our existing investment strategy.

- JHK: Since we only invest in private equity, we do not have much choice. Our strategy is to maintain the same level of investment through cycles. The limiting factor is the availability of attractive funds. We also apply a contrarian view of sorts, noting that high fundraising levels, on average, have a negative impact on a vintage year for example. In general, we believe the credit crisis and the market turbulence is an opportunity for private equity.

Do you expect to become more active in other parts of the world if the situation in the US and UK worsens?

- RH: We have been actively investing in Japan since 1999 and in the rest of Asia, Russia, Eastern Europe, LatinAmerica and South Africa since 2006 so we already have a balanced portfolio in terms of geographies.

- JTA: Yes, we would. As I have already mentioned, we seek to expand our investment and to include emerging markets. This will either be done through multinational managers, which could be an easier option, or alternatively we will invest in local managers where we see strong potential.

What are the reasons why you would drop an existing fund relationship?

- RH: The obvious one: when we do not believe in their ability to create superior return any more. That could rely on team changes, succession issues, strategy changes, poor performance or handling of conflicts of interest.

- JTA: We closely monitor our relationships and even if we have backed a fund once, it does not necessarily mean that we will continue to do so the next time. The key parameters like performance, strategy, structure, performance are evaluated each time invest in a fund/team.

- JHK: We are a strong believer in the importance of close and long-term relationships between GPs and LPs. When we invest in a fund for the first time, it is based on a rigorous selection process and the presumption that that we will continue to support future funds. We seek funds that we expect to achieve returns in the upper quartile. In cases where there is a growing concern that a team is not up to this standard, we would put the team on watch list, initiate a closer dialogue and, in some cases, reduce our stake in the next fund.

What is your strategy for investing in new types of funds? (i.e. distressed funds, secondaries etc.)

- JTA: We are open for investing in new types of funds and have been investing in secondaries for years. However, we will not jump on the bandwagon of the hype connected with some funds being launched post-credit squeeze.

- JHK: We are continuously on the lookout for opportunities and initiatives, e.g. clean tech, distressed funds, or applying the private equity model to new segments. But, we have the same approach to all initiatives: Has the strategy potential? Is the team outstanding? What is their track record? However, as rule we do not invest in secondaries.

The Norwegian petroleum fund and private equity

Sovereign Wealth Funds are increasingly moving into private equity; however the Norwegian Global Petroleum Fund (the Petroleum Fund) has historically been hesitant to invest in alternative assets.

Norges Bank Investment Management is the operational manager of the Petroleum Fund. As the manager of the vehicle, Norges Bank has given the formal advice to the fund's owner, the Norwegian Ministry of Finance, to start to make an allocation towards private equity. The ministry of finance is considering this proposal in its April 2008 white paper to include an allocation to (private) real estate as part of the fund's strategy. The ministry of finance has not indicated when a conclusion will be made.

LPs seek new sweetspot

In marked contrast with the past few years, when many LPs struggled to access 'top-tier' mega-funds, attitudes are shifting in favour of funds in the lower- and mid-market. A recent survey of 130 global LPs conducted by placement agent Almeida Capital reveals that large buyout funds are now deemed less attractive (44%) than small or medium-sized funds* (both 77%).

"LPs have spent two years investing heavily in mega-funds, so looking elsewhere is a natural next step," says Almeida CEO Richard Sachar. The survey further reveals that nearly half of LPs are looking to build new relationships with GPs they haven't previously invested in. "This is probably a doubling of what the figure would have been a year ago," says Sachar. "LPs were extremely busy re-upping over the last 12 months so now many are looking to rebalance their portfolios. It marks a big change in the market."

The study further reveals that nearly half of those surveyed intend to allocate more than $250m in 2008, and nearly a quarter are planning to commit more at least half a million dollars to the asset class. "Investment and allocation committees tend to base decisions on historical performance, which has been good, so this continued interest is not surprising. However if we see a bad year in 2008, I would be surprised to see continued momentum this time next year," Sachar says.

And the survey says...

92% intend to maintain (50%) or increase (42%) their allocations in 2008

Small and mid-sized buyouts most attractive (77%); large waning in popularity (44%)*

47% to invest at least $250m in 2008; 24% to invest at least $500m

Source: Almeida Capital

*Small < $500m; Mid $500m-$5bn; Large > $5bn)

By Kimberly Romaine, editor-in-chief unquote" and Private Equity Europe.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Industry
• Nordics