Dennis Kaiser, Co-Head of the Private Equity Team at Flossbach von Storch Photo: Frank Blümler Source: Universal-Investment

“What is the ideal timing for private equity fund investments? Better to follow a long-term approach and to invest continuously.”

Author: Dennis Kaiser, Flossbach von Storch

In private equity fund investments, it is largely irrelevant whether the stock markets move up, down or sideways, says Dennis Kaiser from Flossbach von Storch. The Co-Head of the Private Equity Team explains what he finds attractive about the asset class and why he believes the focus of the Tectum Private Equity Fund on small- to medium-sized companies is particularly promising. Kaiser also provides a strategic glimpse behind the scenes at Flossbach von Storch.

universal spotlight: Why did Flossbach von Storch decide to launch a fourth Tectum Private Equity fund?

Dennis Kaiser: The three predecessor funds, Tectum Private Equity I to III (each a closed-end fund with limited volume), have performed very well. Moreover, the investment phase of the last fund was completed in the fourth quarter of 2019. We are also convinced that private equity is an attractive addition to traditional investments. The reason for this is the diversification outside the stock markets: whether the market goes up or down is largely irrelevant for private equity fund investments. In addition, the asset class allows institutional investors to invest indirectly in companies and to capitalise on robust real assets. In addition, the significantly lower levels of volatility as well as the long-term investment horizon that private equity offers are of great value to investors. These are the reasons behind our decision to continue the fund series.

How would you describe the focus of your fund of funds?

We remain committed to our proven strategy of investing in private equity funds (more precisely, in up to 20 funds) rather than investing directly in companies. This allows us to build a far broader portfolio. In addition, we diversify over several regions via funds that are active in Europe and the USA. The focus is on buyout- and growth-financing, which make up between 50 to 70 per cent of the portfolio. This is complemented by investments in venture capital funds which acquire start-ups, for example in the technology and healthcare sectors, as well as in funds that specialise in companies in special situations. We concentrate almost exclusively on smaller funds that focus on small- and mid caps. We are convinced that a successful small- and mid-cap strategy is only possible with a limited fund-of-funds volume. Target funds in this sector are often only 200 to 300 million euros in size. Furthermore, target fund managers with a good track record can choose their investors and typically like to build a diversified investor base. This limits how much any single investor can deploy.

We observe fund managers and funds over the course of several years before we decide whether to invest in them.

Dennis Kaiser

What are the decisive factors for Flossbach von Storch when it selects target funds and fund managers?

We monitor fund managers and funds over the course of several years before we decide whether to invest with them. This starts with first getting to know the fund managers and their strategies and continues with more concrete talks and an in-depth due diligence. Capital is tied up for a long time so everything needs to fit, including all the people involved and the set up of the team. It is a prerequisite that the fund managers also have to invest themselves so that they are committed, i.e. they have “skin in the game”. In addition, the strategy has to fit the macro-environment, which is why we cooperate with our colleagues from the Flossbach von Storch Research Institute. In line with our strategy, the target fund needs to actively get involved to add value to its portfolio company. Finally, the investment process needs to follow an institutional set-up  and investment decisions are not made based on a gut feeling.

What was important for you when you selected a capital management company (KVG) for the launch of your current equity fund?

We followed a structured review during our search for a KVG. We wanted to work with a large, reputable player whom potential investors could therefore trust to work professionally. This applies particularly to the reporting, which is fairly complex in Germany and an important factor in many investors’ decision as to whether to invest in a private equity fund or not. Lastly, we also made extensive reference calls – with very positive feedback for Universal-Investment.

How has the asset class private equity fared so far in the current crisis?

The crisis is not over yet so it is too early to tell. However, in-depth discussions with the fund managers of the private equity funds we have invested in have given us cause for optimism. This is because purchase prices in small- and mid-caps – unlike in the large-cap sector where banks may demand loan repayments quickly - are leveraged only to a limited extent. The fact that the markets heated up and cooled down in 2020 has been more the case for the large-cap sector. It has been a huge advantage that our target funds are actively involved in their portfolio companies, who in turn benefit from the experience of the fund managers. We are now in the lucky situation with the fourth fund that we have already invested in target funds but they themselves have not yet built up their own portfolios. We can therefore profit from low valuations in some sectors. I must stress, however, that it is scarcely possible to find the perfect timing because of the long-term investment horizon in the private equity fund sector. So if investors are interested in private equity, they should invest continuously and stick with it. 

Author: Dennis Kaiser, Flossbach von Storch
Date of issue: 3/26/2021