Quietly finding profit

Mid-market funds that are operationally focused and sector specific are best placed to gain commitments from ATP Private Equity Partners, the 9-year-old Danish pension-backed fund of funds preparing to hit the market with a fresh pool of capital.

“We understand the businesses they invest in,” says Susanne Forsingdal, a partner with ATP PEP.  Plus, she adds, “Some of the [large-cap] funds that used to make very strong returns based on highly leveraged transactions are facing hard times convincing investors this is going to continue.”

ATP PEP will “raise” its fourth fund of funds this year. The fund of funds arm receives all its capital from the €54 billion ATP pension fund – sponsored by ATP (the Danish Labour Market Supplementary Pension Scheme) and SP (the Danish Special Pension Savings Scheme) – which can allocate a maximum of 7.5 percent to private equity. ATP PEP invests €500 million to €1 billion every year, usually choosing 10 to 15 private equity funds. The fund of funds targets buyouts, secondaries, distressed and venture funds and also makes co-investments.

“We find private equity to be a very attractive market for us. Some things have to change, so where it’s been a little too easy to make money being a private equity fund, now is the time you really need to prove you can really do well, in a market where leverage won’t help you like it used to,” says Forsingdal.

The fund of funds has about €5.9 billion under management across four vehicles. Its most recent fund, ATP PEP III, collected €1.5 billion in commitments in 2007 and is almost fully committed.

The firm looks to commit €10 million to €100 million to each fund, mostly focused on Europe and North American. ATP PEP does have a mandate to invest up to 5 percent of its vehicle in the emerging markets.

Three years ago ATP PEP established an office in New York to broaden its exposure to the asset class. The investment team came to New York thinking that it would spend a lot of time targeting venture capital funds, but three years later, that has not been the case.

Venture funds the firm expected to come to market never made it to fundraising. “It’s not been easy for the venture industry, there have not been a lot of funds in the market we’ve been able to commit to,” Forsingdal says.

Through the downturn, the firm has quietly invested capital mostly in the small- to mid-market buyout sector.

It has also committed to large-cap private equity funds, but typically backs larger firms that focus on specific sectors, like First Reserve with its energy expertise. Large firms that were “operationally focused” with a “regional niche” rank high on ATP PEP’s relationship list, Forsingdal says.

“The managers we’ve committed to are not necessarily competing in auctions with a lot of guys looking at the same company,” Forsingdal says. “We’ve been very fortunate, I’d say, by luck or chance … we’ve been able to avoid some of the funds that have had real difficulties in Europe. Our portfolio in Europe is looking pretty strong right now.”

The firm’s European portfolio includes Cinven’s third buyout fund, Gresham Private Equity III, Nordic Capital’s fifth fund, BC Partners’ eighth fund, Bridgepoint III, the sixth fund from Advent International and Mid Europa Partners III. In the US, ATP has committed to fund managers including American Securities, Silver Lake, Apollo Global Management, Housatonic Partners, LS Power, Roark Capital Group, Odyssey Investment Partners and Lindsay Goldberg.

ATP PEP also looks for co-investments with its managers, and recently committed $15 million to Odyssey Investment Partners’ acquisition of scaffolding company ThyssenKrupp Safeway at the end of December. The fund of funds also committed $10 million to Mid Europa’s deal for Hungarian telecom company Invitel.

“We’ve always been attracted to co-investment opportunities because they’re all on the same terms that the funds are getting, with no management fees and no carry involved,” she says. “In that way, economically, it’s better for us.”

Like many limited partners, ATP PEP has been pushing for more LP-friendly terms from general partners. GPs have generally been good about transparency, and providing necessary information, Forsingdal says. The fund of funds is most concerned about fees, specifically it wants to see managers use 100 percent of any deal fees to offset the management fee, she says.

“We also are hoping we’ll see a change in the distribution waterfall, so European funds have had back-end carry so the general partners get no carry before returning all investors’ capital and started making a surplus on the return. In the US, it’s more deal by deal carry, we’re hoping to see a move in the US toward European waterfalls.”