Independence Day

The buyout of Deutsche Bank's private equity portfolio sounds complicated?
It was a very complicated process. We bought $1.6 billion in assets from roughly 20 different partnerships within the bank. Most of the partnerships are set up as different vehicles with different ownerships and structures for both regulatory and tax reasons. They are meant to be efficient for their own purposes, but not necessarily for new investors.

While that created a lot of complexity, we were in the fortunate position of the portfolio being relatively clean. Relative to most private equity portfolios these days, ours is performing and crystallising in value. That made the due diligence much easier than we've seen in most of the private equity world, and certainly in the venture world right now.

Why was Deutsche Bank motivated to sell this relatively clean portfolio?
For a couple of reasons. One, the capital charge for private equity and other illiquid assets has gone up dramatically in the past couple of years. As capital becomes much tighter, this is becoming a very difficult asset to own in a larger fashion, especially for U.S.-based commercial banks. Secondly, captive private equity programmes have created more earnings volatility for their banks than anything we were used to during the 1990s. I think that has imposed real pressure. You see that at JP Morgan, Fleet and other banks. That quarter-to-quarter earnings volatility is frowned upon by the analyst community.

The motivation for the management team is that it is much easier to raise money as an independent platform. There were always concerns about perceived conflicts and not as much freedom when you're tied as a captive to a bank that has thousands of clients.

Do you believe the concerns about conflicts of interest are justified?
No. Most of the firms operating as captives have set their decision-making processes up independently, as we did. But I think for the fund-raising market, there is still that concern. I think there's always the concern, especially on the part of large institutions, that there will be pressure applied from somewhere else inside the bank on the portfolio. Therefore, it's easier to raise money as an independent, and we've tried to set up where we have the best of both worlds ? we have independence, but Deutsche retains a minimum ownership position in the portfolio, and we can leverage the vast resources of Deutsche to our benefit.

NIB and two other public pensions ? Ontario Teachers' Pension Plan and CPP Investment Board ? are among the institutions backing your spin-out: how did they get involved in the deal?
It was our choice. We looked at what we thought were three of the biggest and most sophisticated pension funds to back us, that could move quickly, that had the resources to look at a complicated portfolio like this, and had the staying power to be a long term partner for us in whatever endeavours we pursued. These three certainly were the most logical to go to, and they've been spectacular partners for us.

How did you determine a fair value for the portfolio companies?
The bank ran a pretty objective process to determine valuation. We actually paid north of book value for the portfolio. Very few GPs are able to value private equity portfolios, especially those from vintage years 1999, 2000 or 2001, at book value, let alone are able to sell at book value or above. I think it is indicative of the quality of the portfolio and the quality of the continuity of management we've brought to the sale. It was an attractive price to the bank, and is going to provide attractive returns over the long haul for these investors.

Any plans to raise a third-party fund in the near future?
Yes, although right now we're managing both the sale of this portfolio and Morgan Grenfell's private equity portfolio, so we're pretty busy. But it's certainly our intention to continue to be a significant player in the two markets we're involved in: the later-stage U.S. and European markets. It's certainly our intention to move as judiciously as we can towards fundraising for those markets as soon as we come up for air.

What advice would you give to other captive portfolio managers looking to go the independent route?
Our process was complicated and long, but it fundamentally involved understanding the objectives of the institution you work for, and trying to structure deals that met the objectives of both sides. In this case, it really is a win-win. The bank is participating without a significant amount of risk exposure in terms of capital. It is partnering with longer-term investors who have a willingness to take that risk. For us, it was really about meeting both parties' objectives, and we have a willing seller and willing buyers. But in a lot of cases that's tougher to achieve, frankly, because a lot of portfolios are in a lot worse shape, so it's tougher to perform due diligence and tougher to sell at a price that makes any kind of sense in a market like this. I think you need to be realistic about what your institution can provide. We were realistic, but we were able to exceed those expectations.