May 29, 2016
Interviewed by: Tom Franco
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How Partners Group Does It

Andreas Baumann gives an inside look at the private equity investment process at Partners Group, including how it evaluates investments across geographies, how it put its extensive data to work, and the types of investments the firm typically avoids.

Andreas Baumann gives an inside look at the private equity investment process at Partners Group, including how it evaluates investments across geographies, how it put its extensive data to work, and the types of investments the firm typically avoids.

The Partners Group Approach
With Andreas Baumann of Partners Group

Daniel Feder, Washington University Investment Management Company: Hello. We’re here with Andreas Baumann of the Partners Group. Welcome, Andreas.

Andreas Baumann, Partners Group: Thank you.

Feder: Talk a bit about the Partners Group, how you found your way there and what you’re working on in general.

Baumann: There was a background as you might hear, I’m from Switzerland, but actually I haven’t lived there now in over 18 years. I actually started out in China in the ‘90s and spent some time there. Then, through some detours, I ended up in the U.S., as many people do, and went to business school here. I worked for another company here and then I joined Partners Group here in New York in 2003.

Even though I’m from Switzerland, I’ve actually never worked for Partners Group in Switzerland. I started in New York…about 13 years ago, initially focused on private equity investing in the U.S. I also helped build out our presence and efforts in Latin America. In 2010, the firm asked me to relocate back to Asia, so I ran our Singapore office for close to five years and was in charge of our private equity investing activities across Asia Pacific. Then, about a year and a half ago, I came back to the U.S. with broader responsibility for the Americas region.

I’m a member of the Global Investment Committee and, on the managerial side, I’m also a member of the executive committee and the Global Executive Board.

Feder: As an organization, how do you go about comparing one thing versus another as you make decisions? If it’s the case in the direct program where your emphasis is on middle-market transactions, how do you compare something which is local in one region, versus another, a risk-adjusted basis, as these things look pretty dissimilar from one another across these various dimensions?

Baumann: Yes. I think the key words or the key strategy description of ours is relative value and we use those terms very often internally. That can mean different things, depending on what you talk about, but at the end of the day, it’s actually pretty similar.

On one hand, you have the instruments—how to access private markets. You can actually own a private company or an infrastructure or real estate asset in a number of different ways. You can invest directly into that, which we do very actively. You can own it indirectly through either a primary investment—where you make a commitment to a GP, who then finds investment opportunities—or through secondaries, where often times you have visibility on a good portion of that portfolio or those assets that he can buy this way.

So, you have different structural means to access essentially the same underlying assets and there is a difference in the attractiveness of these instruments over time. For instance, secondaries is actually quite cyclical. There are times when it’s very attractive to buy assets through secondaries. Usually, in the trough periods of a cycle where you have a lot of willing sellers, where NAVs tend to be low on a markettomarket basis, you can buy assets very cheaply. And in many areas or many strategies, particularly the large-cap area, it’s actually very actionable because these tend to be large funds, which have a lot of LPs. So, we’re confident in our ability to access assets that way.

But sometimes, it’s less attractive; at the top of the cycle when NAVs are high, you may have also fewer willing sellers. That part of the business can actually vary quite a bit in terms of its attractiveness and relative value.

Feder: Is it the case that your activity is more or less constant across time and that you’re looking at relative value Or is it that the actual activity itself fluctuates and then you’re making decisions one relative to another within a varying investment program?

Baumann: No. It actually fluctuates quite a bit and I think that’s exactly the point of the relative value investing. One of the disadvantages of firms that only do secondaries is that they have to do secondaries all the time. And there is a portfolio construction element of secondaries, which is good and desirable during basically all cycles. But there is a cyclical argument about secondaries as well and you want to take advantage of those opportunities when they’re attractive.

During 2008 and ’09, we were one of the most active players in secondaries, because they were good times to invest. And, I would say, in the last couple of years, probably if you compare it to our market share in terms of AUM in secondaries, we’re less active compared to others.

Tom Franco, Clayton, Dubilier & Rice: Basically, you’re trying to avoid the syndrome “We’re a hammer, everything is a nail.” You want to be able to—

Baumann: Absolutely.

Franco: You must have an enormous amount of data points all over the world on all sorts of businesses. Do you have a mechanism to monetize that data—a big data sort of approach?

Baumann: It has been suggested that we could monetize this, but of course, that’s not possible because it’s all confidential.

Franco: Just in terms of intellectual capital—when you’re looking at a sector, you must be able to slice and dice lots of different ways.

Baumann: Yes. Through our different activities and exposures, but actually more, I think, through the activities of being a lender, a co-investor and so forth, but also through having the data points, as an investor, as an LP in funds, we have a lot of information of how the portfolios develop. Because of that, we have often times very good private comps in a business that is often driven by public comps.

Of course, we also look at that, but to be honest, in private equity or private market investing in general, the private comps may be more relevant because they tend to be smaller companies and perhaps more relevant comparables. So, we often make use of that for our own direct investing activities. But, we also have very good insights into portfolio, which frankly makes us a much smarter investor on the secondary side because we are more familiar with the content.

Also, it’s full circle. It goes back to making us a smarter primary investor that we don’t look at funds when they come back to market when the market presentations are shiny and everything looks great. We form our opinions of other GPs usually during the course of their investment periods of their current funds because we have a lot of interactions and a lot of contact points—as a co-investor, a lender or a client or what have you—which can be very helpful. It makes us just better investors at the end of the day.

Feder: in your view of things that you don’t do, you cover a very broad landscape. What are some things that either institutionally you stay away from or that seem particularly not attractive, in this phase of the world’s history?

Baumann: Within private markets, I think the attractive thing is that we can do a lot of different things, but we don’t have to. Sometimes we don’t do them for a variety of reasons. There are other things we just don’t do, as a more general matter, because we don’t think it’s the right thing to do within private markets on behalf of our clients.

In the first category, I wouldn’t necessarily call this a contrarian investor in that sense, but we do have relative value views. And we are more active or less active in certain strategies in certain regions, doing different cycles. I think good examples for that would be China and Brazil where, actually, we’ve been very reluctant to invest for a number of years, but in both cases, have now just recently started to become more active again.

So, it’s not that we don’t do things, but we’re also completely comfortable not investing, for instance, in China for several years because we felt that it wasn’t the best or we found better relative value opportunities for our clients elsewhere.

In the other category of things we don’t do, as you would expect, are things where we think the investment outcome, the returns of investments, are driven by factors that are difficult or impossible to control for us. We stay away from that. Examples for that would include the commodities—direct exposure to commodities. I don’t think our clients should invest through private-market vehicles to get that kind of exposure. There are other ways to do that probably more efficiently.

Generally, areas where we don’t see our impact—why is Partners Group the right owner of these assets? What can we do? Particularly in this environment where growth, generally speaking, is relatively low and valuations clearly closer to the top than to the bottom—

Franco: Although they’re correcting.

Baumann: They’re correcting in both ways, so in this environment, we’re particularly focused on two things. One is seeking pockets of growth and probably a bit less focused—of course, we pay attention to the macro situation as well—but less focused on the overall economy, more focused on a particular industry or maybe a subsegment and find these pockets of growth, On the other hand, we find opportunities where we can actively create value. That’s at the heart of private markets or the heart of private equity. Active ownership, making companies bigger and better is what we should be doing.

Feder: One other thing we haven’t talked about specifically, that I understand you do invest in, is venture capital. In your views on how you approach venture as an area of investing and particularly as a global investor, how are you looking at that part of the market?

Baumann: We actually invest relatively little in venture capital. We do selectively; again, venture capital is actually quite concentrated, a relatively small asset class, and very difficult to scale profitably. You scale this and I think your returns will come down. On the venture capital side, we’re more focused on maintaining select relationships with what we think are the best firms.

Then, very interestingly actually, on the VC side, secondaries can be very attractive. It’s a bit harder to execute because these funds are smaller, have fewer investors. It’s not like the large-cap funds where you have a lot of investors and get a lot of flow that you can buy. That’s a bit more challenging, but when you can, secondaries can actually be very effective in VC investing.

Franco: I would think valuation would be a big challenge.

Baumann: But what happens in VC portfolios is you have very long durations and it usually takes very long to get to a point—to what we call the inflection points—where you can really start to see which way a portfolio goes.

To the extent that you can invest into a venture fund in year six or seven or eight—basically cut out the management fees and start to see a bit the detraction of the portfolio and weed out the bad investments and identify the good ones—you can really shorten the duration of your investment there. It’s not the same risk-return profile anymore. You may not be able to make a 10X on something, but on a riskadjusted basis, this actually can be quite interesting.

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