Bigger than most

How do you steer an LP super tanker through the sometimes choppy waters of global private equity? In October,Wim Borgdorff, head of fund investment at AlpInvest Partners, spoke to Philip Borel about the challenges facing Europe's largest limited partner.

118 Jachthavenweg is a non-descript, low-rise office block in a business park on the outskirts of Amsterdam. A nearby marina gives the street its name, though the more immediately noticeable landmark is a motorway. Around the corner lies the headquarters of ING Group, the Dutch bank, a shiny steel structure that looks like a beached cruise liner on stilts. Schiphol Airport is not far away: a 15-minute drive will take you there.

This utterly pragmatic setting has none of the playful charm that Amsterdam's historic centre is so famous for. Nevertheless, proprietors of private equity firms visit regularly, especially those who have funds to raise. For 118 Jachthavenweg is the head office of AlpInvest Partners, Europe's biggest investor in private equity and one of the most influential limited partners worldwide. Compared to the ING building, it has the dimensions of a small vessel. But appearances can be misleading.

AlpInvest looks after €30 billion ($37.5 billion) of capital earmarked for private equity, some of which remains to be committed. Not many private equity investment programmes in the world are officially larger. CalPERS, the giant Californian pension and the largest US sponsor of private equity funds, had $29.8 billion in active commitments as per 31 March 2006. The Abu Dhabi Investment Authority and Government of Singapore Investment Corporation are thought to have staked even more capital on this asset class performing well, but their respective totals are kept secret. Whatever the ranking, size is a factor when it comes to private equity investing, and AlpInvest is certainly among the giants in the business.

The group invests on behalf of ABP and PGGM, two fully funded Dutch pension funds with €250 billion of capital between them. Like many Dutch pension plans focused on covering long-term liabilities, ABP and PGGM first dipped their toes into private equity in the early 1980s. They gradually upped their exposure until an in-house approach to private equity investing was no longer deemed appropriate. Instead, the pensions wanted their fund portfolio managed by a team of specialists operating at arm's length and with full discretion over the investment process. The result was AlpInvest, which was created in 1999.

It is an institution whose beginnings were never humble. AlpInvest was a big player from day one, responsible for close to €20 billion of capital and tasked from the very start to invest globally. In 2005, ABP and PGGM committed an additional €11 billion to the project, taking the firm's assets to the current total. Today, AlpInvest commits an average of €3.5 billion per year. 50 investment professionals are on the payroll, split evenly between the firm's two offices in Amsterdam and New York. A third office in Hong Kong is about to open for business.

Overseeing AlpInvest's global primary and secondary fund investment operation is managing partner Wim Borgdorff, a former real estate specialist who led ABP's push into alternative investments from the early 1990s. Fellow managing partners are Volkert Doeksen, chief executive officer; Paul de Klerk, who is in charge of finance and operations; and Erik Thyssen and Iain Leigh, who between them look after the group's co-investment activities.

Borgdorff is tall, well-spoken and as understated as the building he works in. His spacious first-floor office is immaculate and contains nothing out of the ordinary, except for an immediately eye-catching collection of Sam Zell's mechanical greeting cards, those extraordinary half-figurine, half-jukebox designs that the US property tycoon sends out to friends and business associates during the festive season.

Borgdorff worked with Zell during his real estate days, an association he remembers with fondness. “I really like them,” Borgdorff says of the themed toys and, laughing quietly, flicks on the one that plays a version of ‘We've got the whole world in our hands’. “They're so ugly, everyone coming in here walks right over to them. It's brilliant marketing.”

Not that you would ever see AlpInvest revert to similarly elaborate ways of attracting attention. Like most large institutions committing to the asset class, the firm's approach is more low-key. Neither would it be appropriate to reflect on the title of the song in Zell's machine and draw the conclusion that AlpInvest may have an inflated sense of self-importance: the firm does hold a meaningful piece of the private equity world in its hands, but bragging is not what it is known for.

Whatever the firm's chosen style, it is worth dwelling on some of the characteristics that help define its standing in the alternative investment universe. AlpInvest does everything there is to do in private equity: primary commitments, secondary purchases and direct investments – across all stages, all strategies and all regions.

We subscribe to a sustained growth scenario as very realistic for private equity, with very significant flows of capital coming in from institutions worldwide.We're seeing a fundamental paradigm shift towards private markets, which will reverse neither soon nor rapidly. A boom-and-bust scenario is also possible, but it doesn't have the highest probability

The primary fund investment programme has to date committed more than €16 billion to around 200 buyout, mezzanine, turnaround and venture capital funds. The group has relationships with over 125 general partners including some of the biggest names in the field such as Apax Partners, Bain Capital, Blackstone, Carlyle, CVC, Hellman & Friedman, Kohlberg Kravis Roberts, Newbridge Capital, Permira and Warburg Pincus.

€8 billion has been allocated for new primary commitments between now and 2008, an amount that will doubtless arrive in a range of funds across the entire spectrum of fund size. As little as €4 million has been invested in a venture fund; the largest commitment to one buyout partnership so far has been €350 million.

Borgdorff and his partners Henry Robin and Helen Lais in New York and Maarten Vervoort in Amsterdam oversee 18 professionals who concentrate on fund selection globally. When it comes to staying in close enough contact with the market, this level of manpower devoted to the task makes a big difference, says Borgdorff. “Given the sheer size of the opportunity set, I find it difficult to understand why other investors think they can do this with one, two or three people only.”

To make sure its own people remain loyal to the cause, AlpInvest uses a compensation model that Borgdorff describes as being based on market terms and which includes a carried interest scheme. He says that in creating the arm's length entity, the founding pensions did a good job in defining the rules of engagement early on, thus enabling AlpInvest to “strike the right balance between market terms of compensation and the very large pool of capital we manage.”

On the secondary side, AlpInvest's 13-strong dedicated team, which is led by Borgdorff along with partners Tjarko Hektor in New York and Wouter Moerel in Amsterdam, has completed €1.5 billion worth of deals and acquired more than 100 limited partnership interests. In building its track record as a secondary buyer, the firm was a leading investor in the €1.5 billion spin-out of Mid-Ocean Partners from Deutsche Bank in 2002; the purchase of a $1.2 billion fund portfolio from US utility Dayton Power & Light in February 2005; and the replacement of cornerstone investor WestLB in London-based mid-market investor West Private Equity, which recently changed its name to Lyceum Capital.

In total, €3.3 billion has been set aside for secondary investments, and Borgdorff says the secondary team is well-established as a specialist investor in complex portfolio deals, where smart structuring is critical to successfully move exposure from one balance sheet to another in ways that benefit both buyers and sellers.

Given the sheer size of the opportunity set, I find it difficult to understand why other investors think they can do fund selection with one, two or three people only

Operating under the same roof as a large primary player is one of the secondary team's main advantages, Borgdorff says: “Good information is the key to buying at market rates without losing sight of future value creation; it's the difference between winning and losing. As an integrated group, we can be extremely precise in pinpointing value, benchmarking and pricing unfunded and partially funded commitments.”

The third pillar of the AlpInvest platform is co-investment, where the group has put more than €1.5 billion to work in over 50 deals ranging from medium to mega in size. Up to €200 million of coinvestment capital can be injected into a single transaction. Among recent highlights are the firm's involvement in the €8.3 billion LBO in August, led by KKR and Silver Lake Partners, of the semiconductor operations of Royal Philips Electronics in August; and the €8.7 billion purchase of VNU, the media group, alongside Blackstone, Carlyle, Hellman & Friedman, KKR and Thomas H. Lee Partners, in May.

Transactions such as these have helped position AlpInvest as one of the most prolific limited partner co-investors in the industry, a profile that other institutions are eagerly trying to develop as well, though often with limited success. Borgdorff argues that its co-investment capabilities are another valuable differentiator of the firm, even though the struggle for access to direct investments on a no fee, no promote basis is becoming more fiercely fought.

He says: “A lot of limited partners have a history of asking for co-investment, and now much more easy money is trying to sign up. Financial institutions are also coming in with a vengeance, offering capital, advice and financing through one-stop shop solutions. But many LPs battling for co-investment will then struggle to deliver. To be a meaningful coinvestor, you have to understand the deal flow, be there early, stay close to the best general partners and get under their skin without getting in their way. If you can do that, the payback from the general partners will build.”

At no point during the conversation does Borgdorff suggest that opportunities ever fall into AlpInvest's lap thanks to the size of its capital pool alone. Neither does he predict that market forces will make life any easier in private equity going forward, not even for the largest investors. Instead he suggests that the level of competition for assets, which is already intense today, is likely to become even more so in the future.

“We subscribe to a sustained growth scenario as very realistic for private equity, with very significant flows of capital coming in from institutions worldwide. We're seeing a fundamental paradigm shift towards private markets, which will reverse neither soon nor rapidly. A boom-and-bust scenario is also possible, but it doesn't have the highest probability.”

If you look at the large funds since 2000, almost all of them look extremely good. They differ in terms of shades of grey, between good and better. It's not like there is a distribution around some mean that shows a clear negative

AlpInvest's underlying allocation decisions are based on what Borgdorff describes as the firm's “best estimates of the relative size of the opportunities” in terms of geography, investment stage, manager selection et cetera. Market-timing is explicitly not part of the strategy, he says: “We try to stay close to long-term averages and avoid cyclically driven exposure” – hence the long-term commitment to investing across the full range of primary and secondary private equity.

To further hone its understanding of market fundamentals, the firm recently appointed Peter Cornelius, previously the most senior economic adviser to global oil producer Shell International, as one of the private equity investment community's first ever in-house economists. AlpInvest's senior managers also meet regularly with ABP and PGGM to make sure their plans are in line with the two pensions' exposure requirements.

Up to this point, market forces have been kind to AlpInvest. Borgdorff declines to disclose any performance related statistics, but he does allow that “so far, we have lived through favourable times. We started in 2000 at the height of the bubble, and thanks to events in the capital markets, almost everything we've done has turned to gold. We can't take credit for the market support we've enjoyed.”

That said, Borgdorff also points out that the firm's willingness to bet “substantial amounts” against the cycle has been rewarded – confirmation that the market-neutral approach is delivering results.

To illustrate the point, he says: “In 1999, conventional wisdom had it that large buyouts were very competitive, transparent and unlikely to outperform. But we maintained that future value creation is very difficult to predict and as a consequence we created substantial exposure to large LBO funds. Today it is clear that the big buyout funds raised between 2001 and 2005 will deliver superior performance. It shows that each and every segment of the industry has its cycle, which is why we continue to be in all of them.”

As a matter of strategy, AlpInvest aims to develop an in-depth understanding of every layer of private equity in order to then identify the most accomplished operators in each one. In the large LBO space, the latter part of the equation is actually harder to solve than it may seem. “It's difficult to decide who the future winners will be. If you look at the large funds since 2000, almost all of them look extremely good. They differ in terms of shades of grey, between good and better. It's not like there is a distribution around some mean that shows a clear negative.”


It seems that for early-stage investment to work, you need a fairly mature economic environment. On the whole, Asia doesn't have that yet

t goes without saying though that because of its size, AlpInvest will continue to rely on the mega-funds to absorb a sizeable portion of its capital.

Today, these premier firms and their latest funds are so immensely popular that no-one, not even the most influential LPs, can take for granted that their desired allocations will be accommodated. Has access ever been a problem for AlpInvest? Borgdorff points to the strength of the firm's relationships to explain why it has not: “Investing through the down cycle has been helpful, and many US GPs saw in us the kind of large, sophisticated European LP they wanted in the investor base. But access today is of course an issue everywhere, which is why we're pushing for very substantial allocations even in small funds, so far with a good success rate.”

For the same reason, Borgdorff says AlpInvest is keen to support newly established private equity firms early on in their development, even though the risk of newcomers failing is “very real”. A reminder that first-time groups don't always succeed came earlier this year when Taros Capital, AlpInvest's former Benelux-focused mid-size buyout team, failed to attract institutional support for its debut third-party fund – despite a cornerstone commitment from its former parent.

An altogether different set of challenges presents itself in European venture capital, a part of the asset class that is notorious for its capacity to disappoint investors.

Borgdorff though is emphatic that European venture will continue to play a role in AlpInvest's allocation, no matter what the detractors say: “We're among the few groups still standing with a belief, and it is a very much belief at this point, that European venture is here to stay and will make money, even though the post-bubble years have been ugly. Now that the restructuring has taken place, there is a limited number of well-positioned managers looking to invest at a time when funding is scarce.” AlpInvest clearly sees scope for profit from backing these survivors.

He is less optimistic when it comes to very early stage venture in Asia. In 2000 and 2001, the firm backed a number of early-stage investment funds trying to copy the US venture model in Asia, which did not deliver. Comments Borgdorff: “It seems that for early-stage investment to work, you need a fairly mature economic environment. On the whole, Asia doesn't have that yet.”

On the other hand, later-stage venture, growth capital and corporate finance transactions in Asia are expected to perform well. The imminent addition of a third AlpInvest office in Hong Kong suggests that the firm shares the increasingly common expectation that Asian private equity is in the ascendant. For many limited partners, the region is now the investment destination of the future. If Asian private equity does come good, it will attract large flows of yield-hungry institutional capital – AlpInvest's included.

It is easy to see why the firm is pursuing value in strategies shunned by others and markets that must still prove themselves. The task, after all, is to consistently achieve a return on investment that will make a difference to millions of Dutch pensioners. Given the sheer scale of the project, staying in safe harbours at all times will not be enough. Expect Borgdorff and his colleagues to carry on sailing their ship close to the wind.