Fund-of-funds House of the Year

Capital Dynamics, the Switzerland-based fund-of-funds group, started the year with a bang by winning a mandate from the Government Pension Fund of Thailand to invest 3% of its US$10bn of assets into private equity over a three-year period.

The firm has been invested in private equity since the late 1980s and now manages an asset base of US$20bn.

Non-sector-specific and globally active, the firm expanded its presence in the US in 2009 by taking on the management of the assets of Silicon Valley-based HRJ Capital, which has US$2bn under management. The motivation behind the deal was to open up access to leading US venture capital firms, as well as increase exposure to the private equity real estate market. The transaction also saw HRJ founders Ronnie Lott and Harris Barton join the US subsidiary, Capital Dynamics Inc, as managing directors, whilst former real estate head at HRJ, Howard Fields, joined to take up the same role for the firm’s new owners.

At the time of the transaction Thomas Kubr, managing director and CEO of Capital Dynamics said: “We are excited to add the distinguished access to top-tier US venture capital that our new colleagues have built to Capital Dynamics’ current product suite. The transaction reflects our dedication to the US market and emphasises our belief in the strategic importance of the West Coast specifically. We are at an interesting point in the financial markets cycle and look forward to making use of the opportunities together with our new and existing clients.”

Reviewing 2009, Katharina Lichtner, a managing director and head of research at Capital Dynamics, said: “The fund opportunities we reviewed have remained at similar levels in 2009, while our investment pace has slowed somewhat. Many of our existing relationships have delayed their fundraising schedules into 2010 or in some cases even later. Similar to 2008, we reviewed over 360 opportunities, but only entered full due diligence on about 30 funds, eventually investing into 24 funds, many of which are new relationships to us. Apart from the general deal flow, we continue to actively review new and existing managers that are not fundraising, using the time to continue building relationships with our existing managers as well as with teams we are interested in investing with in the future.”

The firm has also been busy evolving and updating its product offerings in response to market demands and the global economic turmoil that blighted 2009. The firm has worked hard over the past year to expand its fund-of-funds product range to offer investor-friendly solutions to access the returns of specialist private equity mangers. It has also been conscious of the need to expand into new markets, with moves into Asian buyouts, mezzanine and emerging managers.

Although Capital Dynamics believes that diversification is key to risk reduction and performance enhancement, the firm also believes that over-diversification leads to an indexing effect. To combat this effect, the firm establishes portfolios of typically 15-20 funds, with commitments diversified over two to four successive vintage years to avoid risk clumping.

In terms of structure and flexibility the firm has gone against the industry norm, which uses standard LP structures in established geographies. Instead Capital Dynamics establishes additional, feeder vehicles to cater to specific clients, coupled with advice on legal structures that aims to achieve the best tax, regulatory and accounting treatment possible.

As industry research is becoming more and more important, Capital Dynamics has also upped its game in this department, with a study published alongside the Technical University of Munich into private equity value creation over the last 20 years as well as producing a ream of articles aimed at giving clients, and potential clients, a perspective on the challenging market conditions.

Like all investors in private equity, Capital Dynamics has been taking an increasingly stringent approach towards its fund managers, and has adjusted its due diligence emphasis to identify those teams that are best adapted to the changed environment.

The firm aims to meet most of its GPs twice a year. However, all managers receive at least one visit a year, which can occur at the AGM or through individually scheduled meetings. Each of its GPs has an assigned senior investment manager, who is expected to stay abreast of all developments regarding the GP, and they are in closer contact with those managers where there is a high overall allocation and/or whose funds are early in the life cycle.

The firm is also at the forefront of private equity risk management. It uses Monte Carlo-based models to evaluate liquidity risk, NAV development over a given horizon and assists in the control of the percentage allocation to private equity over time. It has its own proprietary benchmarking and performance measurement models that quantitatively evaluate private equity portfolios. As a rule of thumb, the firm recommends that US investors allocate up to 50% to the US and 40% to Europe, with the remainder in Asia and the rest of the world, while European investors are advised to allocate 40% to the US and 50% to Europe.

Two thousand and nine was a difficult year for many firms and Capital Dynamics is no exception, but despite the difficulties it has managed to expand its product base, win mandates and, combined with its responses to the tumultuous economic landscape – such as altering its allocation parameters, adjusting its due diligence emphasis and moving into new markets – has made it to the top of the fund-of-funds tree.

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SNAPSHOT

Headquarters: Zug, Switzerland

Founded: 1988

Other offices: London, UK; Birmingham, UK; New York, US; Menlo Park, US; Hong Kong; Munich, Germany

Managing directors: 2 plus a chairman and vice-chairman

Other investment and advisory professionals: Over 100 including more than 20 investment professionals

Assets Under Management: Over US$20bn

Business: Offers institutional investors and family offices a wide range of private equity products and services: fund-of-funds, secondary funds, co-investments, separate account solutions and structured private equity products

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WHY THE FIRM WON

• Winning a mandate from the US$10bn Government Pension Fund of Thailand to invest 3% of its assets into private equity over a three-year period

• Acquiring US fund-of-funds HRJ Capital, increasing its exposure to US venture capital and the global private equity real estate market

• Changing its due diligence approach to focus on those managers that are best adapted to the changed environment

• Increasing its research output

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Shortlist:

• HarbourVest

• Pantheon Ventures

• F&C Asset Management

• Adveq