Taking a creative approach to emerging managers in private equity

^{Kim Pochon, Global Head of Primary Investments, Private Equity, Unigestion}

Kim Pochon is Global Head of Primary Investments, Private Equity, at Unigestion. The firm manages $15bn in assets, including $11bn in private equity across Europe, the US, and Asia. Its strategies include secondaries, direct investments, primaries, emerging managers, and climate impact.

Kim leads the firm’s work with emerging and established private equity managers, as well as secondary and direct co-investment strategies, having transacted on numerous deals. He’s based in Switzerland.

Shaun Beaney, Editor of Preqin First Close, spoke with him about the pros and cons of backing first-time funds, supporting new teams, diversification, and the importance of innovation.

Why are first-time funds and emerging managers such a significant part of Unigestion’s approach to private equity?

We've been investing in emerging managers since the early nineties, so we’re one of the pioneers. We entered private equity when it was still emerging, and I think we’ve kept this mindset to always come back and find new relationships. Our private equity strategy includes primaries, secondaries, and co-investments, so emerging managers are also a good way to diversify and be ahead of the curve. We currently have more than €1bn AUM with emerging managers – about 40 first and second funds.

Is there a focus by geography, industry, or investment theme for the emerging managers you prefer?

We only invest in the US, Europe, and a little in APAC. And we almost only invest in buyouts with respect to emerging managers. We’re sector-agnostic, but we look for sector specialists. We’ve just invested in a GP that has three target sectors, but they have an emphasis on corporate carve-outs, and especially, carve-outs with a transatlantic element. So, they have an investment style which is fairly differentiated. Same also with buy-and-build. Our strategy is to find specialists.

Why specialists?

Because we have a strong belief that they can not only deliver better returns but also provide less risk. We’ve seen on many occasions that having a sector focus, or something very specialized, makes fund managers pick the right deals at the right prices, and discover interesting deals under the radar that other people may have overlooked.

Also, if a company goes into a very difficult situation, the managers have the toolkits to fix them. We see specialization as an alpha generator, but also as downside protection. You have specialist knowledge to make things work when it's a bit more complicated.

Who are some of the well-known private equity firms Unigestion’s backed since the firm’s early days?

We’ve backed Cinven. We backed the first European fund of Carlyle. In the US, we were one of the first investors in Francisco Partners and Silver Lake. In Europe, we were one of the first to invest in BlackFin Capital Partners, ARCHIMED, and in the UK, Bowmark and Hg Capital.

What are the main advantages of investing in a first-time manager?

First of all, it’s the alpha generation – better returns. We want to see TVPI and DPI generation. And there’s a high level of alignment with emerging managers that, maybe, you have less with established managers and very large managers.

Then there are the softer elements, such as accessing up-and-coming stars. There’s a network effect with these managers because when they make it, they’ll be larger and raising multi-billion funds – and they will still treat you well. You can still pick up the phone and have a direct conversation. Plus, it’s innovation, because we have a strong belief that innovation in private equity will come from emerging managers.

What should investors reasonably expect in terms of incentives, such as favorable fees, fund terms, and co-investment opportunities?

For commercial investors like us, it's core to our strategy. It’s something we look for from all the emerging managers we back. Co-investment is a slightly different conversation with GPs. They don’t see co-investment opportunities as a concession to LPs, because they need partners to deploy their strategies. So, co-investment is a win-win situation.

On the risk side, what approach do you take to origination and due diligence when it comes to emerging managers?

We’ve had very few losses in our 30-year track record. But with the two or three funds that did not return a TVPI of at least one, it was due to the team blowing up at a very early stage. Often, the first investments they’d made were not doing so well, there was a lot of tension, and people left the team early. The team component is probably the thing that we look at the most. The bar is always very high. We do a lot of referencing.

Then of course, you have different classifications, such as a team that has worked together for 10 years at a blue-chip, mid-market firm spinning out. Or different people who’ve never worked together – we call it a first-time team in a first-time fund. It's a different risk profile, because they haven't worked together shoulder-to-shoulder. Some LPs completely discard first-time teams. But I think having some diversity in terms of opinions, backgrounds, and even origins is very healthy to make a very high-performing team.

What about the operational side? What if a new team of fund managers have perhaps come out of large financial institutions and never run their own business before?

Nowadays, you have a good ecosystem of service providers, such as placement agents and fund administrators, who are used to working with these types of firms. They can say: ‘We'll take care of that. We know how to deal with that.’

We always do operational due diligence. It's finding the gaps. If there are red flags, we don't invest. But if there are orange flags, it's up to us to actively engage, to help them fix these gaps. We always spend at least 12–18 months interacting with emerging managers before we invest.

What about data for benchmarking first-time funds?

We create a synthetic track record of what people would have made at their different original firms, how it would look if they were running their own fund. We try to benchmark the deals that these individuals have done at their previous firms against other deals by similar firms in the same cohort. We can check with our own proprietary database, as well as using Preqin’s company-level data. And we also have ESG scoring benchmarks.

What’s the diversification case from Unigestion’s perspective?

We’re very focused on the lower mid-market. We think it's a good way to diversify strategies and also relationships. It's public knowledge that succession in private equity funds is a very tough question. Sometimes there are very established managers that have done well, but the succession doesn't work at all. To rely on established managers is also to some extent a risk from that perspective. And then, you also miss out on some more innovative, niche strategies, different types of value, and creativity.

Shaun Beaney is the Editor of Preqin First Close. It’s quick, easy, and free to subscribe here.

Preqin offers one of the world's most extensive selections of alternatives benchmarks, including more than 150,000 available that span 50-plus years of performance data, helping investors make confident decisions when identifying and evaluating new opportunities.

Special thanks to Alicia Wyllie and Faith Tibble in Corporate Communications at Unigestion.

_{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accepts no liability for any decisions taken in relation to the above.}