PEI: Why are you shunning the traditional fund structure?
When you are managing a fund, your alignment is to the fund, not to the investors. The fund structure can create rigidities that may force you to miss or to spoil opportunities. A deal can be too small or too large for the fund, or you are tied because you have already invested too much this year. Or worse, you have not invested enough, and you need to find deals which may not be in the interest of investors.
When you have an investee company and you know you can expand it further abroad in the next five years and make it stronger, why would you sell it earlier? When you depend on a traditional fund structure, you may be selling it because of fundraising requirements. That sort of frustration got us thinking about this new model. It would be better for investors to stick with this business until it was the right time to sell it.
We are not planning to waste our resources pretending to go after deals to justify fees, offices or sector teams.
In some instances, we have seen buyers putting their names on auction processes, competing, pushing prices up, just to get press reports to show they are active in that country or in that sector – even though they may have no strong desire to make that deal at all. We have seen many funds making investments because they have an office in that country and they feel they have to do something. In our model that wouldn’t happen, because we are not planning to waste our resources pretending to go after deals to justify fees, offices or sector teams.
Does that mean you plan to operate with a completely open mandate?
We are completely flexible; we can do minority or majority investments. That’s where it’s exciting and where we become competitive. But we will stick to what we are comfortable with. Very often we have people coming to us saying: why don’t you invest in real estate? But we are not going to compete in a sector that we are not familiar with, and educate ourselves with investors’ money.
New firms often struggle because of a lack of track record. Given the tough fundraising climate, how do you convince LPs to back you?
We talk to investors who don’t want to invest in funds anymore – and that’s one of the reasons why the fundraising climate is difficult. We have already demonstrated [a track record] by doing two transactions in 2012. When you find good opportunities, the investors are there. Many of these institutions are well equipped for co-investments – [but] they are not yet well equipped for direct investments and that’s why they may need us.
What’s your management fee and carry model like?
We take fees on deals rather than on commitments. Investors have to pay for due diligence when they want to pursue an opportunity that they like, not because they want us to find out whether it was a good opportunity. We present arguments to them on why this is a good opportunity and why they should invest. They keep their own judgement.
When you raise a fund you have to set the rules on carry and fees for 10 years. The difference in our approach is that we can just agree this on a deal-by-deal basis, which offers flexibility. In each situation we can do what is best for our investors and for OceanBridge. And that’s what we call alignment.