On the Record: Edward Claessen, European Investment Fund

Last year, the EIF invested €1.35 billion in 63 European private equity funds. Most recently, it was one of the backers of NorthEdge Capital, a first-time fund focused on the north of England, which closed on £225 million in April. PEI asked principal Edward Claessen whether the EIF’s approach has changed since the financial crisis

PEI: Why did you back NorthEdge?

A lot of managers we [have] historically backed were London-centric … and [yet] EIF has now backed a manager that is completely focused on the north of England. But in general, we liked the manager [and] the investment strategy. We do first-time teams and first-time funds; but we obviously like to see experience in the team and NorthEdge is a good example of that.

What is your overall investment strategy?

We try to find the best GPs with the best performance, while meeting EU community objectives. But we do take more risks by investing in first-time teams. By going into a [first-time] fund we are trying to give it a seal of approval and therefore hopefully [make it] acceptable to other LPs. Most of the time we invest, we commit at first closings – and often through our investment, they actually reach first closings.

Most of the capital we manage comes from the European Investment Bank [EIF is part of the EIB group]. The most important criteria for us is that the capital we invest is used to help small and medium sized enterprises grow. We often invest in markets which are seen as unattractive by other LPs. Currently, southern European countries are receiving little interest from LPs due to the difficult financial situation, so we try to invest there. We do try to support regions where there’s a lack of capital and where we can take an active role in further developing these markets.”

What must a GP bring to the table to secure a commitment from EIF?

Criteria for fund selection includes checking during due diligence that the value creation should primarily be through revenue growth. We check what happens to the capital in these companies; we’d like the money to go into the companies to [support growth], launch a new product or enter new markets, rather than [the] money being taken out.

What’s also really important for us is to have the manager fully committed to the fund, [i.e. having] very good key man clauses and ensuring that the carried interest remains with the manager (as opposed to going to a sponsor or cornerstone investor). A high investment of the management into the fund is important. If there’s not much of their money in the fund, they may not care so much if it underperforms; [they] might just be interested in keeping [it] up and running to maintain management fees.

And we typically analyse the management budget. EIF’s view is that the management budget should just pay for the running costs of the GP. We are quite strong in our view on a 100 percent fee offset. Most funds generate revenues by charging transaction fees. Each time they make an investment or sell a company, they might charge fees for that; and we want all of these fees going back to the fund.

Do you feel LPs have more influence on fund agreements in the current climate than they did pre-crisis?

It’s clearly easier to get your terms and conditions adopted [at the moment]. But EIF’s requests have not changed materially from pre-crisis levels. We have always been quite strong in our demand to get sufficient investor protection clauses and good alignment of interest between the LPs and the GPs. We try to avoid abusing the current market dynamics of having more power, as in my view this will only hit us back when the situation reverses.