London-based fund of funds manager Osmosis Capital, which is currently raising its first fund, believes it can act as a bridge between investors keen to access low carbon investments and a highly specialist and nascent GP community.
The viability of private equity funds of funds in general is currently the subject of debate due to typically lucrative fee structures and the increasing ability of mature LP programmes to invest directly rather than through intermediaries. However, there is little doubt that where investors can see the potential for outsized returns but have little clue how to access the best managers in the space, funds of funds still have a vital role to play.
This, at least, is the theory that resulted in the establishment of Osmosis Capital last year. Says the firm's chairman Jon Bailie: “When we launched, the issue of energy security was high on the agenda. LPs could see the potential of low carbon investment and were wondering how they could access it.”
Sean Gorman, a partner at the firm, says that diversification – an all-important LP requirement – is possible to achieve in the low carbon space. He says there are around 500 funds globally targeting a wide range of investment themes. One of the self-evident difficulties of investing in such funds is their scant track records in what is an embryonic industry. “The visibility of fund performance is low,” says Bailie, “but, in any case, future performance doesn't necessarily relate to past performance and as an investor it's more important that you back teams which are well organised and understand the dynamics of the sector and the underlying portfolio investments.”
Bailie, the former chairman of UK funds of funds manager Pantheon Ventures, says the Osmosis team has around 40 years of collective investment experience in the renewable energy space, which arguably gives them the required credibility to make judgements about the likely success or otherwise of fund managers. By contrast, many of the low carbon-focused funds Osmosis will consider investing in have track records going back less than two years.
Gorman says the firm intends to bring deal flow to its fund managers and will use around 30 percent of its debut fund for co-investments. The remaining 70 percent will be committed to primary private equity or venture capital funds as well as secondary purchases from LPs which are seeking liquidity.
According to market sources, Osmosis is aiming to raise around €200 million and is believed to be targeting a first close by the end of this year.