Building the business

Sitting down in February opposite Steffen Meister, the Partners Group’s chief executive officer and a man referred to informally by one colleague as being “hardcore intelligent”, it is easy to see how the Switzerland-based private markets investor has built up a reputation in the private equity community as a group that “gets it”.

Meister, a wiry 40-year-old Swiss national, talks in great detail – and at considerable speed – about the various private markets around the world, from Chinese residential property to regional infrastructure opportunities.

Partners Group has grown since its inception in 1996 into an influential force in private markets investment. At last count it managed assets of more than €20 billion, split between private equity, debt, real estate and infrastructure. It is a near-impossible task to break the assets down by individual funds in individual regions and geographies, as the firm serves its clients’ investment needs in various ways ranging from individual programmes – direct European mezzanine investments, for example – to holistic packages, investing the clients’ money in whichever segment, geography and strategy offers the best value in a global context at any one particular time.

In this respect, therefore, Partners Group is an unusual beast. When pressed on whom he considers the firm’s closest competitors to be, Meister approaches the question from an asset class-specific route, because there is no simple answer. In terms of an integrated private equity programme, he points towards the likes of HarbourVest Partners, the fund of funds giant, and investment banking franchise Goldman Sachs (at which the three co-founders of Partners Group had originally met as employees). For mezzanine programmes they are more likely to come up against the likes of ICG Group and TCW or, again, Goldman Sachs. “I’m not sure these groups would even see us as a straight competitor, because we might share deal flow,” says Meister. “They might see us as an investment partner.”

In terms of real estate investment, the market is in “incredible transition”, Meister continues, but in many situations it is still the “large banking funds” with which Partners competes.

Infrastructure, meanwhile, is the “most fuzzy” situation, he says. “Other than Global Infrastructure Partners there aren’t really any global institutions in our space.

“I’m sure that will change as the global banks build up their platforms,” he adds, “but today it is a little uncompetitive … certainly compared to private equity.”

Those who do compete with Partners Group tend to have little in the way of negative comments about the group. The closest thing to criticism is the suggestion that the firm is as much a marketing machine as an investment business. Whether this is driven by sour grapes on the part of competitors or a genuine assessment is unclear.

Meister says that the firm simply made a decision to have the  client facing team distinct from the investment team to allow the latter to focus on the job in hand.

What is clear, however, is that undoubtedly this is a firm that considers its positioning – among clients, shareholders, the media and its own employees – as being as crucial to its success as a business as simply making the right investment calls.

A mention of the Partners Group culture prompts Meister to speak passionately and at length about the need to attract staff, not just with the right investment credentials, but also with the right cultural fit. He refers several times to the importance of shared beliefs, “a shared mission”. “We like each other,” he says with a smile. “We all of us have not only colleagues here, but friends. It makes it so much easier to build and develop a business, especially as you go into new regions.”

The purpose-built office which Partners calls home has clearly been designed with this in mind. Each floor is open plan, and as Meister walks us through the desks towards the central area he points out various teams and individuals – the chief economist, the debt team, etc. At the centre of the building is an open, square atrium with banks of red benches around three edges, like a miniature auditorium, and a cinema-size projector screen at one end. This, explains Meister, is where the entire team gathers on a weekly basis to conference with either their Asian or American colleagues. Members of the team will present ideas or explain regional investment trends and new arrivals will introduce themselves to their new colleagues.

The new colleagues to have introduced themselves in the last 12 months have included additions in Japan, Munich, South Korea and Dubai among others.

Meister’s own office is clean and unfussy and overlooks the MacDonald’s fast-food restaurant across the street. On top of a filing cabinet next to his desk sits a life-size replica of Darth Vader’s helmet. If it wasn’t for the light sabre mounted on a stand near the window, the helmet might seem out of place; Meister does not seem like a man for clutter.

When asked about the assorted Star Wars memorabilia, Meister explains that the helmet had been a gift from Kurt Birchler, formerly Partners Group’s chief financial officer and now head of product operations, as a playful suggestion that Meister had been behaving like the Star Wars villain during the intense, work-heavy period of the IPO in 2006. Meister had responded to the gesture by buying them each a light sabre, presumably to help settle any future confrontations.

The IPO, explains Meister, was instigated as a means to secure the long-term success of the business with regards to motivating, rewarding and attracting employees. The idea was arrived at following the first retirement of one of the partners in 2004. The discussion over how to value the business and buy the retiring partner out was a friendly one, says Meister, but lasted for six months. “We thought ‘this cannot be the set-up’. It should not be us negotiating a price; it should be the market.” Having a market price for the shareholders would facilitate the “slow generational transfer” of the business, he adds.

He is keen to point out that since the IPO, none of the business has been sold off and that 70 percent of the company is owned by its partners and employees. “This is a young partnership – many in their 40s and 50s – and we have no intention of going away. We want to build this business over the next 20 years.”

Aside from easing the transfer from one generation to the next, the listing also encourages the employees to work towards the long-term goal of growing the business. “People should not just be put in their boxes of private equity or real estate, driven only by a carry scheme or bonus. We want incentives also to be integrated and involve the long-term future of the company.”

Being a listed investment firm, however, does raise the question of whether there is pressure from public market shareholders and analysts to focus on growing assets under management ahead of all other priorities. Is this the case for Partners Group and does that therefore inform the strategy and business goals? This is clearly not the first time such a suggestion has been made to Meister, who first points out that he has never come across an unlisted investment manager that would not like to grow assets under management.

Meister turns the question on its head. “If we want to be successful in the next 10 years in terms of assets under management, the next decade will be about building up the investment platform. We have hired a lot of people, even in the last three years, and we have built the firm with the clear conviction that if we build the investment platform further, and if we continue to have a leading investment platform in five years time, the rest will take care of itself.”

When pressed on whether the firm has a specific target in mind – either for AUM or the size of the investment platform – Meister explains how the amount of money they raise from clients is based on investment opportunties, rather than how much they can raise. Every two or three years, he says, the firm holds a summer partnership meeting somewhere in the Alps – preferably away from Blackberry or iPhone signal – to discuss strategic matters and the developments of the following five years. “It always starts with the question of how much deal flow do we expect to see, how competitive will the environment be and how many deals do we believe we can transact on,” he says. “Then we calculate back: how many people will we need to transact? Can we build the team organically or should we integrate a team?”

All the firm’s fund offerings are capped, says Meister, pointing to private equity secondaries as an example. “I believe many people see us as having the best secondaries deal flow, but we were very disciplined to cap our latest secondaries fund at €2.5 billion,” he says, adding that the next one will likely be capped at €2 billion. “That’s because that is what we feel we can invest in the next two to three years. I think we could easily raise €5 billion for a secondaries fund, but we feel comfortable that if deal flow is significantly greater, then we can go back to the market and raise more money.”

theory of relativity

The Partners Group investment model focuses on identifying “relative value” in the market. “We try to follow programmes that don’t force you to focus on one segment of the market if for two years there are hardly any deals there. We prefer programmes which give us the opportunity to do whatever we believe is the best in the market at one particular time,” he explains. The global private equity funds, for example, are raised every two years and mandated to invest in all financing stages, in all the regions and in primary, secondary and direct investment opportunities. In 2006, more than half of the global private equity fund was invested in primary funds and less than half in directs and secondaries. The successor fund, raised in 2008, has so far invested around 50 percent in secondaries.

In the last 12 months, the Partners Group private equity programme has shifted further towards direct investment and secondaries, although fund investments still play a part. “I expect this to continue for some time,” says Meister. The firm invested $4.8 billion during 2010. Just a quarter of this was in primary fund investments. The firm completed 40 direct investments during the year.

Every six months, Partners Group publishes a piece of literature for clients and contacts called the Private Markets Navigator. The document features the firm’s “Relative Value Matrix”, a proprietary tool designed to communicate exactly which market segments are the most relatively attractive in each of the asset classes.

For private equity, the matrix is pointing predominantly to small- and mid-sized buyouts and growth capital in Asia and other emerging markets.  Large buyouts in Europe and North America, meanwhile, are “underweighted”. Small- and mid-market buyouts in the developed markets, however, are attractive (although not as attractive as in Asia).
The relative merits described in the Relative Value Matrix are clearly reflected in the recent deals that Partners Group has inked. In February this year, for example, it invested in Nord Anglia Education, a private schools group, alongside existing financial sponsor Baring Private Equity Asia. In the same month, Partners made its first Korean investment, taking a stake in tire manufacturer Saehwa International Machinery alongside local GP STIC Investments.

“We have had the luck to be able to source a number of joint transactions and joint-lead investments in regions like Asia and Latin America,” comments Meister, “deals which show – in our opinion – much better growth characteristics than deals in the US and Europe. Deals which were done at very attractive multiples, many at 5.5 times or 6 times EBITDA; a significant discount to where the larger deals have traded in the last 12 months.”

One obvious question is: How reliant is Partners Group, a global organisation spread across nearly all markets and numerous different asset classes, on local managers to pass on co-investment opportunities? Does it have the capability to source small-cap deals, writing €50 million equity cheques, or does it rely on local GPs passing the opportunities down? A little of both, says Meister.

“We have the ambition and ability to source from all our local offices [the firm has 14 around the world], but what we will often do, depending on the size of the deal and the industry specialisation, is involve other partners as joint-lead investors,” he says. “Likewise we are reciprocally invited.”

Given that, now more than ever, private equity firms are being pushed to add value to their portfolio companies through being hands-on investors, does Partners Group not run the risk of looking like a passive co-investor on these deals, charging fees without getting its “hands dirty”? Not quite, says Meister, who points to the global aspect that the firm brings to deals when investing alongside local partners. “Many of these businesses have clear global ambitions and quite often we can come in with our network and introduce buyers and business partners.”

He acknowledges, however, that this cannot always be the case. “I don’t think we claim that in each of the 40 transactions agreed last year we are building the businesses and developing companies; it depends on the type of investment. Sometimes we do pure joint investments even without a board seat. Where we are joint lead, then it is different.”

“The industry has made a lot of claims about being involved with businesses on a day-to-day business,” Meister continues. “I think we are realistic enough to know that this is not always the case and frankly this is not needed in all cases.”

The question of how a firm really adds value leads Meister neatly into another train of thought: how the private equity industry is changing. In the 1990s many of the transactions were driven by financial engineering. “You buy the right company with the right financing and assuming the multiples do not collapse, the financing will go some way to making that investment a success.”

The following decade saw various sectors, such as telecoms and IT, and geographies open up to private equity investment. This, says Meister, required the manager to be closer to the asset. “If you buy in Germany from a family which has been in the business for 100 years, you had better do the contract in German, or they will not sell it to you. In Asia, that is even more the case.”

This need for proximity to the investment asset will be even more prevalent in the decade to come, says Meister. “It’s a question of scale and scope,” he says. “As an investment manager, if you have global ambitions you need to have a certain size. You need both the local presence and the global backbone that contains the industry and sector knowledge.” This is especially true, says Meister, when it comes to taking small- and mid-cap firms and transforming them into pan-regional or global companies.

Expanding on the theme of the industry’s future, managers in the private equity market will start to fit into three groups. First there will be the local or thematic specialists. “If they are niche enough, close enough to local regulators and local families, you will never be able to beat them on their ground,” says Meister.

The second category is firms with global ambitions, either in one asset class or, like Partners Group, with an integrated approach. These groups need to be much larger, says Meister. “Of the 500 people we have today, about 300 are on the investment side. This will not be sufficient in five years from now,” he says, adding that Latin America and Southeast Asia will certainly require additional resources.

“For a firm like Partners Group we will substantially increase our headcount in five years’ time. And probably double the investment staff from 300 to 600 people.”

The third category features some of those firms which Meister had expected to fit more into the second bracket. “The firms that have grown out of the large US buyout firms, like Kohlberg Kravis Roberts and The Blackstone Group, are going for more of a financial conglomerate model, with things like commodities and prop trading alongside private markets activity.”

The message from Meister is clear: like KKR and Blackstone, Partners likes size and scale. Just don’t expect it to venture beyond private markets.