Q&A - Charles Soulignac, Managing Partner, Fondinvest Capital

Given the downturn in the markets, would you, as an LP, do anything differently now? What advice would you give to a first time investor?

Since its inception, Fondinvest Capital has been targeting European small and medium-sized funds, with the will to invest in the "best-in-class" GPs. Even in a market downturn, we pursue the same strategy with regards to GP selection, that is, we follow teams in which we are already invested and forge relationships with new teams with which we have established long standing contacts.

Investing in a fund implies not only that you take a risk based on the business (strategy, team, country, type of investment), but also that you protect such a risk with well-defined terms and conditions.

For a first-time investor, with no experience in private equity, we recommend to invest through a fund-of-funds or, better, through a separate account. Whichever solution the investor chooses, manager selection is crucial.

What would you say is the biggest change in terms of how a GP treats its LPs now?

Considering the existing relationships we have with GPs, we saw some of them increasing their communications and meetings in order to explain both the current situation of their portfolio and the valuation of the underlying companies. Others made changes either on the fund's structure by, for example, establishing a side fund, or on the fund's terms and conditions by modifying the hurdle rate.

Regarding commitments made in new funds, we did not notice significant changes, but GPs are obviously more flexible in negotiating the terms and conditions.

What is more relevant when assessing the merit of a GP, their track record or the current underlying portfolio?

Assessing the merit of a GP is not an easy task to do in the current environment. Either you are re-upping in a well-known team, or you are committing to a new fund. Track-record analysis provides a good visibility on performance in terms of IRR and multiples for funds N-2, as well as an overview of the quality and skills of the team. However, it is key to understanding the health and value creation of the portfolio by analysing the underlying companies and following their evolution over the time.

What is the best indication of the true skill of a GP - cash in versus out in the last five years, or current performance (realised and unrealised)?

The best indication of the true skill of a GP is when a fund is quasi-liquidated, with performance indicators (multiple, IRR) over a defined period of time. In the current environment, it is pleasant to see cash in (due to some exits) and cash out (due to some investments), showing that the portfolio managed by the GP is not "under the water".

Do you see the typical 10+2 year fund structure changing at all in the future?

For existing funds, we may have to extend by one or two years the period of divestment. For funds currently raising capital (or little-invested), a 10+2 year structure will be sufficient.

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• LPs
• UK / Ireland