International group ABB has set up a unique third-party fund of funds arrangement to manage private equity for tax-advantaged Swiss pension funds.
Daniel Dubach, chief investment officer at the Baden-based ABB Investment Foundation explains that the foundation started in April 1998 managing internal money from the ABB foundation and the group’s pension fund.
Dubach says the Sfr4.5bn (e2.8bn) ABB fund itself has a private equity target of 3% of total assets.
The second fund, he says, was launched in April 1999 in conjunction with three external clients including the City of Zurich pension fund. “The programme is run by the ABB foundation but it is only for tax-exempt Swiss organisations. We are the only player doing this in the Swiss market solely for tax-exempt organisations such as pension funds.”
Dubach notes that while the ABB foundation runs the programme, it is not responsible for the investment decisions regarding fund selection. “Frank Russell Capital in Tacoma in the US is the investment adviser we work exclusively with. There is excellent connection between us and together we managed to invest assets in the industry for funds one and two. This is a fund of funds approach, we are not investing in direct private equity but in partnership. For pension funds I think this is the best way because they are primarily looking for diversification and risk control.”
Dubach notes that the first fund was global with an emphasis on the US as the biggest private equity market. The second programme, he points out, is North America only – including Mexico and Canada, with the third being another global offering. “Here at the foundation we set the framework to decide the allocations of each fund between different regions and different stages of the private equity spectrum.”
He says targeted allocations for venture capital (30–40% of portfolios) in the US is between 15–30%, Europe including Switzerland ranges from 0–6%, similarly with Asia, while ‘other regions’ are bracketed from 0-3%.
Buy-out funds (40–50% overall) target the US at 24–40%, Europe 8–20%, Asia 0–8% and others regions between 0–4%.
Mezzanine financing (10% total) gives the US 5–10%, Europe 2–5%, Asia 0–2% and others up to 1%.
Finally, ‘special situation’ funds, which would include restructuring funds and spin offs to other companies – so not a specific private equity category – receive 10–15% in the US, 4–15% in Europe, 4–10% in Asia and 2–5% in others.
Dubach explains that the number one priority with the spread is to put the risk across the stages and across regions. “If we can collect enough money we will come again each year so that we have a spread over the vintage years. If you have all the money invested in the same year you could face a vintage year and encounter the problems that we have seen in the past. You really need to have a fund of funds with the best diversification possible.”
Both the first and second funds are now closed; the first at Sfr 110m and the second at Sfr100m.
“We are currently carrying out the marketing activities for the third fund and we are addressing approximately 250 names - but we expect to have Sfr100m for the fund,” says Dubach. “Private equity is an issue for large and mid-size pension funds in Switzerland at the moment, because they have an allocation target in that field. We think it would be a success if we could raise five to 10 Swiss names.
“I think normally Swiss funds are fairly open-minded about private equity. If you want to take a completely different approach then you should make direct investments and take these risks, but we exclude that.”
The fund, which was launched at the beginning of March, will have its first closing on June 30 and second closing on September 30.
Dubach says that in terms of returns the foundation is not making any particular predictions. “We think though that it should be possible to deliver 300–600 basis points over the Russell 3000 in the long term. The long term means a time period of 12–14 years because this is the tie-in period to the funds. One particular aspect of our approach is that because it is specifically for tax-exempt organisations, with us they are nearer to the market because we have our own direct private equity programme.
“We do not go via agents and we decide the specifications through our private equity advisory board together with our clients who we consult with on a quarterly basis.
“With Frank Russell the key issue is that we have someone who can then open the doors into the right markets.” Hugh Wheelan