What makes for good fund due diligence?

Inves­tors who have not previously been inves­ted in private equity (PE), or only to a limi­ted extent, often make invest­ment decis­i­ons based on their own expe­ri­ence with equity invest­ments. Thus, short-term chan­ges in invest­ment stra­tegy can be made rela­tively easily when inves­t­ing in the stock markets.

Profi­ta­ble invest­ment stra­te­gies in private equity, on the other hand, aim for sustaina­bi­lity and should be inde­pen­dent of short-term fashions or trends. Expe­ri­en­ced private equity inves­tors ther­e­fore build up a port­fo­lio of fund and indi­vi­dual invest­ments over very long peri­ods. This conti­nuous invest­ment process redu­ces tempo­rary nega­tive influen­ces in the macroe­co­no­mic area.

In contrast to equity invest­ments, the selec­tion of the indi­vi­dual fund is of parti­cu­lar importance in the case of private equity. In reality, the perfor­mance of private equity funds is much more disper­sed than that of equity funds. Only if a PE inves­tor acqui­res a company at a low price, deve­lops it well and sells it in the best possi­ble way can he create a signi­fi­cant increase in value. Inves­tors should ther­e­fore examine very closely whether the stra­te­gies and unique selling propo­si­ti­ons of the respec­tive funds promise above-average returns.

In our view, the audi­ting of private equity funds must be more than a compa­ri­son of histo­ri­cal perfor­mance data with data­base values, the brief inter­view of indi­vi­dual invest­ment profes­sio­nals, and the tax and legal review of subscrip­tion docu­ments by lawy­ers. — Only a compre­hen­sive fund review enables return/risk opti­mi­zed invest­ment decis­i­ons. For exam­ple, in our fund reviews, we regu­larly inter­view a fund’s entire invest­ment team, obtain exten­sive refe­ren­ces, and analyze histo­ri­cal invest­ments on an indi­vi­dual invest­ment basis.

This fund review should gene­rally be perfor­med by persons with suffi­ci­ent private equity expe­ri­ence. Our team has a very rich comple­men­tary opera­tio­nal invest­ment expe­ri­ence. I myself have been active in the private equity busi­ness for 20 years and spent almost 13 years as a fund mana­ger at BC Part­ners. My colle­ague Georg Rems­ha­gen worked as an equity analyst for more than 20 years and was most recently jointly respon­si­ble for Commerzbank’s German equity rese­arch. Julien Zornig, on the other hand, was invol­ved in the selec­tion of hedge funds and private equity funds at Beren­berg and MM Warburg for many years. — This is a tall order, but in our expe­ri­ence, above-average returns can only be achie­ved over the long term through high-quality due dili­gence of target funds.

I have alre­ady refer­red to the depth and breadth of our fund review. We offer this to our custo­mers in the form of two services. In our consul­ting busi­ness Asto­rius Consult we regu­larly support larger single family offices with private equity issues. Here, our custo­mers bene­fit in parti­cu­lar from our know­ledge gained from many years of direct invest­ment business.

In our core busi­ness, the Asto­rius Capi­tal funds, we provide private indi­vi­du­als, family office clients and foun­da­ti­ons with diver­si­fied access to the private equity asset class from a mini­mum subscrip­tion of 200,000 euros.

Many of the compa­ra­ble products on the market are unfort­u­na­tely still not trans­pa­rent in terms of their costs. For exam­ple, the amount of third-party costs is not repor­ted in a compre­hen­si­ble way and inves­tors are some­ti­mes char­ged with travel costs and insu­rance fees of the service provi­der. In contrast, we commu­ni­cate third-party cost esti­ma­tes clearly and under­stan­d­a­bly and, of course, pay our travel and insu­rance costs out of our own pockets.

Howe­ver, choo­sing the right PE funds is much more important. Many provi­ders focus prima­rily on the marke­ta­bi­lity of well-known private equity brand names. In contrast, we — like our custo­mers — invest a considera­ble amount of our own funds and ther­e­fore give prio­rity to risk-return conside­ra­ti­ons. For this purpose, we have scru­ti­ni­zed more than 800 fund mana­gers in Europe over the past four years. Curr­ently, we are focu­sing on Euro­pean small and mid cap funds. One result of this is the invest­ment in the Spanish small cap fund Nazca IV.

About Thomas C. Weinmann
Thomas Wein­mann looks back on almost 13 successful years, nine of them as a part­ner, at BC Part­ners. Prior to that, he spent more than two years finan­cing LBOs at the then German market leader Dresd­ner Klein­wort. At the end of 2012, he foun­ded Asto­rius Capi­tal with the aim of making the private equity asset class acces­si­ble to inves­tors. He also makes the expe­ri­ence gained in this way available to entre­pre­neu­rial fami­lies. In addi­tion, Mr. Wein­mann acts as an advi­sor to an estab­lished private equity fund. In addi­tion to his opera­tio­nal acti­vi­ties, he was active as a board member at the German indus­try asso­cia­tion of private equity and venture capi­tal compa­nies (BVK) between 2011 and 2015.

As an invest­ment mana­ger, Mr. Wein­mann has inves­ted a total of € 2.2 billion of equity in five compa­nies for the funds advi­sed by BC Part­ners, subse­quently mana­ged them and execu­ted company sales and IPOs. He also supported the successful place­ment of three BC Part­ners funds as invest­ment mana­ger and in structuring.

About Asto­rius Capital
The Asto­rius Group opera­tes in two busi­ness segments. Asto­rius Capi­tal enables private indi­vi­du­als, family offices and foun­da­ti­ons to make diver­si­fied capi­tal invest­ments in private equity funds via fund of funds concepts. The inves­tors in Asto­rius Capi­tal funds aim at a long-term invest­ment in the private equity asset class of EUR 0.2–20 million. Asto­rius Consult supports large fami­lies in their invest­ments in private equity funds and direct invest­ments. Both busi­ness areas are mana­ged by the same people from our part­ner group.