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Staffan Jåfs, Head of Private Equity at eQ Asset Management, shares his thoughts on notable private equity trends developing across Central and Eastern Europe (CEE), Russia and the Commonwealth of Independent States (CIS), and discusses which factors are most important to his firm in the fund selection process. eQ Group is the largest independent asset manager in Finland with EUR6.5 billion in AUM. Of this, EUR2.7 billion are private equity assets managed by eQ Asset Management (formerly Amanda Capital) through seven private equity fund of funds, as well as several private equity fund portfolios based on consultancy agreements.
Your firm has been investing in private equity since 1994 and, over the past two decades, a noticeable shift of looking more to the East than the West has occurred. What have been the drivers behind your investment strategy thus far and how do you anticipate your focus changing going forward, if at all?
We started investing in Western Europe in the mid-1990s and had quite a successful run with mainly local LPs. By the mid-2000s, these LPs saw an opportunity in diversifying into Eastern markets. At that time, we viewed many of the Eastern European economies as being in the same phase of private equity development as the more Western countries were in the late 1980s to early 1990s, characterized by funds of US$100 million to US$200 million in size with a concentrated focus on smaller companies. So, at the request of our LPs, we launched a project to look at how this opportunity could be realized in terms of investment products, which resulted in us raising our first fund of funds focused on Russia/CIS and CEE in 2006.
Our LPs are interested, first and foremost, in Eastern Europe and Russia. In looking at the CIS region outside of Russia, we are investing in Ukraine, which has a large consumer market. However, the other CIS markets are still very immature—the private equity infrastructure is not yet there and hardly any M&A activity is taking place. This, combined with the political situation in many of these markets, led us to conclude that we are not yet comfortable with the risk-return profile there.
In terms of future development, it is unlikely that we will expand our mandate and launch new vehicles focused on other emerging market regions. Our LPs prefer to have us covering the markets with which we are most familiar—those where we have strong investment experience and know the manager community well.
Your firm has invested in more than 100 private equity funds across several regions. Which criterion do you value the most in a fund manager? Based on your vast experience, have you found common characteristics amongst successful funds?
Our strategy is to focus on realized historical performance. This does not necessarily mean that there has to be a common team track record; it may be that individuals possess strong personal track records and when they are then combined with similar people, it becomes an interesting proposal. We typically invest in second-generation funds and upwards, which means that first-time funds generally don’t make it through our selection process. As a consequence, we may have missed out on certain opportunities, but we have also avoided a number of blow-ups at the fund manager level.
There are certain situations when a first-time team will end up in our portfolio; for instance, if a team is spinning out of a captive organization. There are a number of really strong performing situations like that in our European portfolio. In addition, sometimes you see individuals with a good history in perhaps a larger, more international buyout house, who decide to leave with a few buddies to set up something smaller that is focused on the small- to mid-cap segment— those are the types of situations that we are very interested in reviewing.
From a sector perspective, our core theme is the pure consumer play. We don’t invest with energy-, infrastructure-, venture capital- or real estate-focused managers. Our strategy is more generalist—a focus on small- to medium-sized companies in the consumer sector, e.g., retail, pharmacy, telecom, services, manufacturing, etc. We believe this is where the strongest growth will be in the near future. It is also where exit activity has taken place. When international strategic players are evaluating how to enter an emerging market, they typically like to acquire market leaders—and building these market leaders has been a common investment strategy for the GPs we have been backing.
To be successful, GPs must be extremely local and know their markets. It is also important that they are perceived to be very local by entrepreneurs and the people from which they source deals. GPs really need to know all the players in these markets because, at the end of the day, exit opportunities are more limited than they are in the West. GPs need to be extremely well connected on all levels—not just in business but throughout society—in order to produce strong returns.