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Institutional Investor Profile: Lorenzo Lorenzotti, Managing Director, ACG Private Equity27/08/2008. Source: AltAssets. 
Lorenzo Lorenzotti on Central and Eastern Europe, on cleantech, on the attraction of sector-focused funds, on listed private equity firms and on the evolution of the financial industry.  ACG Private Equity, previously Altium Capital Gestion, was founded in 1998 by former partners of Apax Partners. The firm manages private equity funds of funds on behalf of institutional investors, private banks and family offices.
Lorenzo Lorenzotti is the managing director of ACG. He joined the firm in 2005. Prior to that, he was vice-president of Lazard Frères in New York and Rolaco Services.
What is ACG's strategy?
'ACG is one of the few Paris-based independent fund of funds managers. Our focus has always been Western and Eastern Europe through small focused and targeted funds. We take the complete opposite approach to most other funds of funds by having 15-18 investments in each fund, instead of doing what I call the "minestrone" approach, which is 30 or 40 investments in each portfolio, which essentially amounts to an index. Our modelling has shown that between 15-18 funds per portfolio maximises returns and still allows you to have an acceptable and almost negligible amount of risk. This is what we target.
We are launching a new fund most likely at the end of this year, which will be much larger than our usual funds, which are between €100m and €150m in size. It will be targeted at around €250m to €300m and will continue our focus on the best mid-market funds in buy-out, growth capital and special situations in Western and Eastern/Central Europe. We exclude venture capital funds.
Since Wladimir Molov started the business in 1998, working with dedicated funds and private accounts, we have always focused on strong relationship-building with managers which we have seen perform time and time again. We like those that stay true to their beliefs in terms of the types of investments, the size of the investments, the teams, the focus and the alignment of interests with their investments.'
How much capital do you currently have under management?
'We have approximately €500m, all in funds of funds.'
How many managers have you invested in?
'Over the past ten years, we have allocated capital to around 44 GPs.'
On average, how much do you usually invest per year?
'It depends on what fund or vehicles we have open. It is hard to predict but I would say that we commit between 25 per cent to 55 per cent of the fund per year.'
How much do you usually invest per manager?
'Anywhere between €5m and €15m. I think with the new fund we could see our ticket size increase to between €10m and €25m.'
Could you tell me more about your due diligence process?
'We have narrowed our circle to around 2,500 funds in Europe, including CEE. We have narrowed that down further to around 300 independent funds, of which we have relationships with around 44 we have already invested in. The rest we closely monitor on an ongoing basis.
Some we eliminate because we do not like the teams; they may have altered their business plans, investment strategy, or perhaps moved up or down in size too much. We also eliminate those that have had major break-ups in their team, maybe due to bad chemistry developing over time, or spin-outs.
Once we have focused on the funds that are both raising during the year and that we like, we spend a lot of time with them. We will have meetings with them before we go to paper due diligence trying to understand a bit about the people.
We believe that it is a people business. To invest you need to get to know the people. On a personal basis, we need to understand what drives them. Are they still hungry to prove themselves to their peers, or are they satisfied and just trying to make management fees.
We like to know where they are in their life. Sometimes they are having personal issues. We came across a manager of a great fund who was in the middle of a messy divorce that was taking up a lot of his time. That to me is a major issue, and you have to understand this and get underneath their skin in terms of what gets them going in the morning. That is what we look at from a subjective point of view.
From an objective point of view, we do a lot of work on the transactions that they have done, looking at multiples and how much they have paid for a company, for example. We want to make sure that each investment was done for the right reasons, not just following the herd to put money out.
This objective analysis has to be done on a deal-by-deal basis and on a team-by-team basis. We want to understand how well they have performed and whether the performance is due to one or two good deals or spread across a portfolio.'
Do you invest in first-time funds?
'There have to be the right ingredients. The team starting the fund has to have spun out of a group or has to have some demonstrable experience. First-time funds - it is all in the definition. If you define a first-time fund as someone who has no experience and used to be an advisor somewhere that is different from three partners that have spun out of a brand name firm. We look at all the ingredients. We have backed teams that have spun out, that are first-time funds but have brought with them a good history and a consistent pattern of smart investments.'
How important is CEE in your investment strategy?
'The founding partner, Wladimir Mollof, is Bulgarian and has always had a particular insight into the Central and Easter European region, as well as Western Europe. His experience in the region has allowed us to build strong local contacts in order to get on-the-ground feedback from the people that we are meeting in terms of reputation and experience. We would obviously need to verify and check the transactions they have done. This allows us to feel much more comfortable with investing in the management teams.
There are people that seem to appear out of nowhere and announce they are launching a fund. Some of them are local ex-oligarchs that wield their power and connections in order to both raise the fund as well as investing it. We have no interest in those situations.
There is less transparency in certain countries. You have to be extremely thorough when doing your due diligence. If you are able to do it successfully, I think there is an enormous opportunity, as in many ways New Europe is the driver for Old Europe. The GDP of most of these countries is about six or seven per cent, and even though there is creeping inflation, the growth of the middle class in Poland, Bulgaria or Romania is clearly evident. The middle class are growing, and as a result they are earning more and spending more. GPs that are able to capture some of this market are then able to sell it to a Western European company looking for local distribution and local networks. We have seen that pattern repeatedly now and we have already invested in several managers where we have seen some encouraging signs.
They are small economies and they represent approximately five per cent of the overall private equity industry in Europe, so you have to be conscious that you cannot over-allocate. Now that a lot of the brand names have moved into CEE, I do not know where they are going to get transactions of the size they need to have to invest their money. A lot of the privatisations have already been done and many experienced players are already in the area.
It is getting very competitive. I think the people that will succeed and continue to succeed are the ones that have been in the area for a sufficient time, and have the network and the deal flow.
Local knowledge is essential. Without experience in the region I do not think you can be a good investor. You cannot invest locally and not monitor your investments on a regular basis. You have to be on the ground and have people there that are trustworthy. You cannot do it by remote control.'
Which are the geographies in Europe that you feel are on the rise?
'Southern Europe. The laggards in Europe in terms of private equity have been, and continue to be, Italy and Spain. They are two very vibrant economies, but different, in the sense that there is less activity and less transparency than in the larger private equity countries.
You have to apply skills that are more adaptable specifically to Spain and Italy, that is, to focus on groups that have very strong local connections. Deal flow is key and that usually goes to people in the know. Inside information is regularly traded and regularly utilised in those countries. In Italy there are maybe 15 family groups that have these connections. In Spain, likewise, and some of them have started private equity groups. I think these groups will do better over time because they will get the deals before they go on auction, and will be able to exit them at the better time. I think an intelligent investor could do very well.'
Do you invest in sector-specific funds?
'We have invested in several sector-specific funds. We like people that are focused - I think that maybe it is a reflection of our own strategy. We like a tight focus, especially if they have been involved in a certain industry for a long time, and really know what they are doing. One fund we like is GMT Communications Partners. They are specialists in telecomunications and media and have done very well as a result. We like country-specific funds also.'
Which areas do you think will be of increasing interest to you going forward?
'I think we will see more in CEE. We feel that there is more activity and growth potential there. CEE is far less affected by the credit crunch. I think we will focus more on that region with our new fund. We will probably be overweight in that area, and it may constitute 25 per cent of the fund. We will still allocate the majority of the fund with managers in established regions such as France, the UK, Germany, the Netherlands, Spain and Italy.'
What is the biggest issue facing the private equity industry today?
'There is a lot of talk about communication in private equity, and the general public not knowing what the industry does. There have been a lot of articles, with politicians talking about something they do not understand. Private equity, by its very definition, is private, but it needs to communicate better.
Also, the public listing of a number of big name players is becoming increasingly prevalent. In my opinion, it is a fundamental mistake based purely on the greed of the managers that want to liquidate their positions, or need the public paper for future transactions. They are wrong to do this, because they go against the grain of what the private equity industry should be about, which is the alignment of interests between the managers and the investors, so that both are suitably stimulated: one to invest and the other to make good deals. By taking away that incentive, either by going public or by having exorbitant management fees, you take away the balance.
We are also living in an evolution of the financial industry. Around 15 years ago, for my Italian friends who were entrepreneurs, the only source of financing would have been to go to their local bank, which was probably run by a friend. If they were in a cash crunch and needed a line of credit they would go to him and ask for it, and they would get it based on trust. With Basel II you cannot do that anymore. With the emergence of local private equity players people are beginning to recognise that another option is going to a private equity fund. It is more expensive, as you have to give up some equity, but with good managers you get more than cash, they can genuinely help you with your business. Bankers usually do not know anything about your industry - a private equity manager is the complete opposite. There are so many examples of companies that have been really helped by private equity managers. Unfortunately, those are the kind of examples that do not get a lot of press coverage.
Now that some of these banks have disappeared, the large private equity funds have become the new banks. They can invest, they can do debt, equity - everything.'
Is cleantech and new energy of interest to you?
'I think it is the new industrial revolution. In terms of actual deals it depends on how you define the term. Cleantech could be an automotive company in Germany using new, "green" materials. Usually though cleantech is defined more often on the venture capital end of the spectrum, working on new energy storage, and delivery. There are a few venture capital firms in Europe, but they are small deals, and I do not think there will be enough of those types of transactions to go around. The bulk of the venture capital funds in this sector are in the US.
Some of the energy companies could be considered cleantech as they invest heavily in wind turbines and solar energy. I think some of the larger funds that can get a piece of this activity will do very well.'
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