The rise and rise of Partners Group(3)

For an asset manager with global reach, Partners Group has its home in a curiously provincial setting. Situated at Zugerstrasse 57 in Baar-Zug, a small town 30 minutes outside Zurich, the firm's headquarters is surrounded by an eclectic mix of office buildings, industrial architecture and residential housing. (Another giant of Swiss private equity investment, Capital Dynamics, is just a few minutes drive up the road, in the centre of downtown Zug. Both firms are benefiting from the small town's business-friendly tax regime.)

Right next to Partners Group's headquarters is a small mattress shop. Across the street is McDonalds, where Partners Group employees sometimes buy Happy Meals for their children during the firm's family day son Saturdays. As a first time visitor climbing out of the taxi, you will likely pause for a moment to take it all in before entering the building and greeting the receptionist. The place is not what one expects.

On the inside, Partners Group Central has the look and feel of a nimble and thriving investment boutique. Busy-looking and smartly dressed young people rush up and down the staircase. Many of them speak Swiss German to each other, although English is the firm's working language. There is plenty of glass, a lot of open space. Much of the sleek furniture on the open-plan floors is from USM, a furniture maker ubiquitous in Switzerland and famous for its “modular” designs.

The office is purpose built and Partners Group has been residing here since January 2002. Before the firm moved in, founders Marcel Erni, Alfred “Fredy” Gantner and Urs Wietlisbach agreed to each spend money on something that would make the office a nicer place to work in. Thus Erni, who colleagues joke may be even more successful as an investor in art than in alternative assets, brought in paintings and sculptures from his personal collection. Gantner kitted out “Fredy's Fitness Factory”, the in-house gymnasium. Wietlisbach sponsored the cafeteria, which has had the nickname “Wietlisbucks” ever since.

Arranged across three storeys, it's a sizeable office, but now space is beginning to run out. With two thirds of a global workforce of more than 220 currently based in Baar-Zug, the firm has decided to add another floor, and the builders are scheduled to come back this autumn.

The extra square footage will come in handy: Partners Group expects to employ 300 individuals by the end of 2008 and more than 500 people five years from today. And if, as seems certain, Baar-Zug remains the firm's epicentre, more office space will be a welcome resource.

BUILDING THE BUSINESS
The personnel numbers alone give a sense of how rapidly Partners has grown during the past 11 years. Set up in 1996, the firm very quickly made a name for itself as a private equity innovator. As with most start-ups, however, the beginnings were humble: at one point early on, the firm signed an expensive lease for an office in Zurich that for a short while committed it to paying out more in rent than it had cash flow coming in. Pressure was on, in other words. But assets under management grew steadily, as did headcount, and Partners soon added hedge funds and real estate to its product range to become a provider of alternative capital around the world. On 24 March 2006, Partners Group went public in a successful IPO on the SWX Swiss Exchange. Since then, the firm's progress appears to have accelerated even more.

We want to make sure we continue to bring in the resources we need to make sound judgement calls going forward

Steffen Meister

When it arrived on the scene in the mid-1990s, Partners Group first drew attention to itself as a proprietor of structured private equity products. Former investment bankers Erni, Gantner and Wietlisbach had met whilst working in various roles at Goldman Sachs. Whilst developing their business model, the three men soon realised that there was demand for private equity in markets they knew well such as Switzerland and Germany. Gradually, their focus shifted towards catering for this demand.

One of the first ever products was Princess, launched in 1999 as a $700 million private equity fund of funds product structured as a convertible bond and listed on the Swiss and Luxembourg stock exchanges. Princess' original investors were primarily institutional investors from continental Europe. The private equity investment industry hadn't seen much quite like it: furnished with an insurance wrap to guarantee investors' capital, Princess was a far cry from the limited partnership structures that were, and to a large extent still are today, private equity's investment vehicle of choice. (Today, Princess Private Equity Holding is an investment holding company domiciled in Guernsey and listed on the Frankfurt Stock Exchange, investing in private equity and private debt instruments.)

Other structured offerings followed, which led some Partners Group competitors to get into the habit of saying that the firm was primarily, if not exclusively, a savvy designer of complicated investment products, with otherwise not very much affiliation with the underlying private equity assets themselves. In addition, some detractors would routinely share their view that the firm was “all about fund marketing”.

Partners Group veterans remember the sniping. However, when asked about it during a wideranging interview with PEI in May, Wietlisbach and the firm's CEO Steffen Meister are quick to dismiss both criticisms.

Meister, who joined the firm at the end of 1999, argues that for a number of years, the market was paying a disproportionate amount of attention to Partners Group's structuring capabilities: “We weren't doing structured products for the glory. We did them because regulatory constraints meant many European investors couldn't go into limited partnerships, and because they gave us an edge over our competitors from the US.” Now that the firm has long been established as a proprietor of limited partnerships in different asset classes, sceptical talk about “Partners Group and structuring” is no longer widespread.

Wietlisbach deals with the “mainly marketing” charge: “This perception is just not true. Our private equity investment programmes have achieved an annual outperformance of 8.2 percent over Thomson Venture Economics. When we started, people at many of our competitors did everything – asset management and marketing. We decided early on that an alternative asset management business needed a dedicated fund marketing team. It would cost more money initially, but we knew it would leave our investment team to get on with investing, without many distractions from marketing. Of course our marketing people really are out there all the time, which is probably why some people have claimed marketing is all we do.”

MANY TENTACLES
Unencumbered thinking about the firm's future has long been a Partners Group hallmark. Ambition has been another. In 2001 and 2002, after the venture bubble burst and private equity went into a tail spin, the firm's partners agreed to cut their salaries to help keep cash flow positive, retain staff and hire more people. It was a testing time.

Today, the firm operates a large infrastructure across offices in London, New York, San Francisco, Singapore and Guernsey. At year end 2006, according to the firm's most recent annual report, assets under management stood at SFr17.9 billion (€10.8 billion; $14.5 billion), up from SFr10.9 billion in 2005.

Even a very cursory outline of the firm's manifold activities today is quite a tour de force. In private equity, Partners Group manages a number of primary and secondary vehicles and is increasingly active as a direct co-investor. Its portfolio monitoring professionals are keeping a close eye on more than 3,500 portfolio companies in Europe, North America and Asia.

Limited partnerships, listed vehicles and open-ended mutual funds are all part of the portfolio, as are growing platforms specialising in private infrastructure and private equity real estate. In February, the firm announced the acquisition of the real estate investment arm of Pension Consulting Alliance in the US, an influential gatekeeper in the private equity real estate industry.

Limited partnerships, listed vehicles and open-ended mutual funds are all part of the portfolio, as are growing platforms specialising in private infrastructure and private equity real estate. In February, the firm announced the acquisition of the real estate investment arm of Pension Consulting Alliance in the US, an influential gatekeeper in the private equity real estate industry.

All told, SFr12.7 billion of Partners Group's assets is in private equity, followed by hedge funds (SFr2.7 billion), private debt (SFr1.1 billion) and wealth management (SFr800 million).

THE FLOAT
Many in the market had been expecting the firm to go public at some point, although Wietlisbach and Meister play down the suggestion that because of its appetite for listed products, the firm had always been headed for an IPO. Nevertheless, a fundamental change to the ownership structure had been in the making for a while.

From the very beginning, the three founders gave out equity in the firm in order to retain and incentivise other partners and employees. During a two-day partner offsite meeting in a hut in the Alps in the summer of 2005, a number of different strategic options were on the table as to how to further widen ownership in the firm and to strengthen relationships with core clients. Recalls Wietlisbach: “We could have done nothing, which some partners felt was in fact the second-best option. We could have sold ourselves to a large bank, but many of us have worked for large institutions in the past, and it became clear that especially the younger partners in the firm valued our independence.”

In the end, the partners voted for a listing and since then have not looked back. The firm went public at SFr63 a share and surged 33 percent in the first day of trading, closing at SFr84 a share and a market capitalisation of SFr2.24 billion. At press time, the stock (ticker symbol PGHN) was trading at SFr174, just a few Swiss francs short of a 52-week high of SFr180.

The firm's 34 partners and principals, along with many employees, own 70 percent of the shares, with Erni, Gantner and Wietlisbach, the three biggest shareholders, owning just over 14 percent each. Gantner is executive chairman; Erni and Wietlisbach both serve as executive vice chairmen.

Typically, option holders are locked in for a five- to sixyear term, with an additional two-year non-compete clause after leaving the firm – a mechanism designed to match the length of the firm's client mandates.

According to Meister, the stock has seen relatively little turnover. At the time of the IPO, 40 percent of the overall free float of 30 percent was offered to longstanding Partners Group clients, which since then, albeit on paper, “have in many cases made more money from the stock than they ever paid us in fees”, he says.

Wietlisbach says the IPO has also created huge strategic benefits. He says the firm is now more visible in the market place, especially in Asia and when dealing with investment banks: “We're getting good coverage from analysts, and being on Bloomberg has also helped. We have found that when we participate in tender processes, we're now almost always in the last three.”

General partners of private equity funds are also drawn towards the firm. Comments a London-based fundraising specialist: “They have done very well, and right now they are on top of the world. They can be pretty tough, asking people to come to Zug to critique their business model. But GPs want to be associated with large pools of money, and so Partners Group is in demand.”

EXPANSION
Partners Group may be flying high at the moment, but Meister and Wietlisbach speak modestly about the firm's achievements. Their stated intention is to carry on building the firm. Says Meister: “We want to make sure we continue to bring in the resources we need to make sound judgement calls going forward. Investment management expertise cannot be exclusively built organically.”

In order to grow the team, the firm recruited more than 60 people in 2006, and this year's tally is expected to be even higher. At any one time, some 30 MBAs and other young graduates participate in the firm's associate programme in Zug, where they spent a year working in every part of the business under the tutelage of different business heads. Those who stay with the firm afterwards become junior executives, begin to specialise in certain areas and spend significant portions of their time in the firm's offices overseas.

When the downturn comes, I wouldn't be surprised if we saw one of the mega-funds become a fallen angel

Urs Wietlisbach

Wietlisbach says the associate programme is a great way of bringing talent into the firm. “You find out people's strengths: who is good? Who can do equity, and who can do debt? We're now getting CVs from students in India and Argentina, and we're unbureaucratic about vetting them. Marcel [Erni] will personally talk to students on the phone for half an hour, and if the conversation goes well we will send them a plane ticket.”

This system is likely to remain important for as long as Partners Group's core asset classes continue to expand. “We want to become the leading independent manager of alternative assets,” is how Meister defines the overall vision. Unsurprisingly, both men have a positive take on the future.

OPPORTUNITIES, RISKS
Meister says both private infrastructure and real estate offer “enormous” scope for growth at present, and predicts that the firm's diversification into both segments will continue at pace.

Private equity, too, still “makes an awful lot of sense”, as Wietlisbach puts it, even though some worrying signs of excess have appeared in the industry of late. The hype surrounding private equity is damaging he says, and some of it is self-inflicted: “Private equity appearing on the front page of The Economist is fine, but private equity professionals appearing on the front page of glossy magazines is not good for the industry. However: 90 percent of private equity has not changed, midmarket funds are still doing what they have always done, and we certainly do not drive big cars and throw big parties.”

Wietlisbach also says he has reservations about the risks being taken by sponsors of very large LBOs: “We have seen it before. When the downturn comes, I wouldn't be surprised if we saw one of the mega-funds become a fallen angel.”

Speaking of downturns: Wietlisbach says it will come between “now and 2011”. For Partners Group and its shareholders, he predicts the impact will be limited. Why? “Partly because we're diversified across asset classes, and partly because we are an asset manager rather than an investor: 90 percent of our earnings come from management fees, the model is less performance-fee driven.” Hence it is reasonable to expect stable earnings and less volatility, he concludes.

To steer through the alternative asset maze, Partners Group uses a proprietary benchmarking tool called the “Value Navigator”. At this point in the cycle, life in the private investment markets is poised to become even more interesting than it has already been in recent years. Partners Group, through its many different product lines and investment teams, will be closely involved in most of the action. When the market turns, the “Value Navigator” may prove an invaluable tool.