Switzerland’s Partners Group Changes Its Profile, not Its Approach
Co-founder Alfred Gantner and new chairman Peter Wuffli aim to pursue global growth but vow to stick with Partners Group’s diversified strategy.
Its retractable roof and swooping, flying saucer–like shell design, Marlins Park is difficult to miss on the highway leading downtown from Miami’s airport. The 37,000-seat stadium, home of the Miami Marlins baseball team, doesn’t automatically suggest itself as a suitable venue for an elite private equity meeting. But when Partners Group, a Swiss private investment firm, decided to hold its annual investor conference in the U.S. for the first time, in March, it booked the gaudy stadium for the opening-night dinner. Founded in 1996 by three former Goldman Sachs Group bankers, Partners has expanded briskly over the past half decade, doubling its assets under management, to almost $44 billion, and nearly tripling its staff, from 250 to 700. With the once-reclusive company looking to project itself onto the global stage and woo a larger category of institutional investors, the arena-style coming-out party represented a confident declaration of intent.
“The firm is at its next juncture,” says Alfred Gantner, one of the three co-founders. Partners’ new growth strategy goes hand in hand with an effort to institutionalize the leadership of the firm beyond its founders — a rarity in the private equity industry, where most of the big shops are still stamped with the often-forceful personalities of their creators. The co-founders will continue to be active in investment decisions, but as Gantner puts it, they want the future of the firm to be less about them and more about Partners itself. “The firm is more diverse, it’s more international, there are more stakeholders, so it makes sense for us to do the things that we’re doing now to take the firm to the next level,” he says.
Partners is calling on some big names to boost its international profile — and face up to the challenges that greater size creates. Chairman Peter Wuffli, former CEO of UBS, is one of those names. Tapped to succeed Gantner, who continues to chair the firm’s global investment committee, the slight, bespectacled Wuffli took to the lectern at the dinner in March and introduced himself to roughly 200 investors seated at tables arranged around the stadium infield. “Often coping with success is tougher than coping with failure,” he said, explaining his determination to focus on risk management. “When you’re very successful, everybody applauds you, and you actually start to believe it. You get a creeping complacency, an arrogance.”
Wuffli’s words, echoing through the open roof into the salty Miami night air, carried a special resonance. The evening was not just a showcase for Partners; it marked Wuffli’s return to the spotlight after seven years in the comparative wilderness. Wuffli served for four years as chief executive of UBS before being pushed out in 2007 as the bank’s losses from its involvement in the U.S. subprime debacle, which eventually topped $37 billion, began to emerge. He’s kept a low profile in the years since then, overseeing the Elea Foundation for Ethics in Globalization, a Zurich-based philanthropic organization he founded with his wife, Susanna, and sitting on the boards of Lausanne-based business school IMD and the Zurich Opera House. He also penned a book on legal ethics, published in German under the title Liberale Ethik.
Partners rose out of the flowering of European private equity in the late 1990s, but it took a path distinct from the likes of Apax Partners and CVC Capital Partners. Most investors in German-speaking Central Europe, the firm’s first providers of capital, were unfamiliar with U.S.-style private equity, so the group chose a diversified strategy that relied largely on participating in other firms’ deals via primary investments through a fund of funds or buying existing private equity holdings on the secondary market. It also focused on small- to midcap deals that larger houses tended to pass over. This has given the firm its unique integrated approach, which allows Partners the flexibility to cycle in and out of different instruments — direct investments, primaries or secondaries — depending on where it sees the best long-term relative value. “You always have the right instrument to hand,” explains Urs Wietlisbach, one of the co-founders, who oversees client relations as chairman of the markets committee.
Lately, the group has been putting more emphasis on direct investments. They accounted for just over a third of the firm’s allocations last year, on a par with secondary investments, and the plan is to raise that share to 50 percent, according to Wietlisbach. Partners is looking to broaden its clientele beyond its traditional base of institutions in German-speaking Europe, the U.K. and Scandinavia. It has made some inroads recently: Asia and Latin America account for 13 percent of the firm’s investors, by assets, up from just 1 percent in 2006; over the same period North America has grown to 16 percent from 9 percent.
Successfully executing the firm’s growth strategy will require better contacts at a much higher level in the institutional investor world. To that end, Partners has recruited three high-profile individuals to its board. In addition to Wuffli, they are Charles Dallara, former head of the Institute of International Finance, who serves as chairman of the Americas, and Patrick Ward, a former managing director at Goldman Sachs who was one of that firm’s leading partners at the time of its 1999 IPO; he is chairman of the U.K. and the Middle East. These hires represent a serious statement of intent for a firm that has until now kept a fairly low international profile. Operating from its headquarters in the tiny Swiss canton of Zug, a low-tax haven that’s home to numerous hedge funds and commodities giant Glencore Xstrata, the firm had been run by a compact board of six people — all Swiss — on which its three co-founders exerted an outsize influence.
“This firm’s had remarkable success, but it’s been built from the ground up,” Dallara says. “These guys have never had to build extremely senior relationships with the leaders of banks, insurance firms and sovereign wealth funds.” China, Japan and the Middle East are all areas where Partners has, in Dallara’s view, significant catch-up work to do to ensure it is being heard at the top table of investors, especially by those in the sovereign wealth fund world.
Wuffli might appear an odd choice as the man to guide Partners to its next stage of development. He has no real private equity background to speak of; his main experience of day-to-day operations at UBS was as head of the asset management group. And in other respects he is a controversial figure. A 2005 Businessweek story described the former McKinsey & Co. consultant as “the Master of Zurich,” a figure of generational significance who had brought “the glory days back to Swiss banking.” In 2008, after Wuffli had resigned from UBS, a scathing internal report blamed the bank’s big credit losses on a chronically inadequate system of risk management and laid a big part of that blame on the former CEO for allowing the situation to develop.
Partners’ co-founders see no risk in the elevation of Wuffli — who joined the firm’s board in 2009 and has steered its risk and audit committee since then — to the chairmanship. On the contrary, they see it as a crucial step in the evolution of Partners into a more mature outfit. “It will make things better to have someone with Peter’s experience chairing board meetings,” says Gantner, adding that Wuffli’s more inclusive, less headstrong style has already given board meetings “a new level of discussion.” Wuffli himself describes his role as helping the firm transition away from being a predominantly founder-led concern to an organization with a durable institutionalized culture. “I’m a values person,” he says. “The vision of this firm is to be responsible for the dreams of the 100 million beneficiaries for whom we invest.”
Ward rose to become co-head of Goldman’s equities business and finished at the firm as chairman of Goldman Sachs Asset Management International. As boss of the IIF, Dallara made his name as a skilled negotiator in several of the financial-political crises of the past two decades, including the post-2010 restructuring of Greek debt. Their private equity experience is as thin as Wuffli’s. But Gantner, who served as chief executive until the firm’s IPO on the Zurich exchange in 2006, stresses that the newcomers do not sit on Partners’ investment committee or take a hand in the big asset allocation calls. Those matters remain firmly in the hands of Gantner, Wietlisbach and the third co-founder, Marcel Erni, who serves as Partners’ chief investment officer. André Frei and Christoph Rubeli, who were appointed co–chief executives in 2013, take care of day-to-day management.
“We felt that we were growing up as a firm, and it made sense to get some wise heads in so that we could better start to understand the direction we’re going in and how we can make sure we flourish as we grow and become more diverse,” Gantner says. “A firm succeeds if it grows beyond its founders.” That’s not to say the move to open the board up to these high-wattage external personalities is without risk. Whether a firm like Partners can maintain the flexibility of thinking that has been its animating spirit to date even as it becomes more institutionalized remains to be seen. “There’s a trade-off,” concedes Gantner. “The firm might get a little slower, absolutely. But we think it’s a risk worth taking.”
Private equity investing started slowly in the postwar years, then burst onto the scene in the 1980s in the U.S., most spectacularly with Kohlberg Kravis Roberts & Co.’s daring $25 billion buyout of RJR Nabisco in 1988. The combination of ample junk bond financing, aggressive bankers-turned-buyout-artists and bloated corporations generated a spate of audacious deals, along with returns that caught the eye of institutional investors.
The industry was slower to take off in Europe. Citicorp and Schroders launched venture funds in the 1980s that would later grow into CVC Capital Partners and Permira, respectively, and Apax Partners branched out from venture capital into small-scale private equity in the early ’90s, but none of them had yet raised a major European private equity fund when Gantner, Wietlisbach and Erni decided to set up Partners Group in 1996.
The group’s first hurdle was to overcome a perception gap. Europeans had heard about the “barbarians at the gate,” as the book about the RJR Nabisco buyout was titled, but few institutional investors in German-speaking Europe had any real idea what private equity was about, associating it with the rapacious caricature of distressed investing and leveraged buyouts. “You had to explain the term to people because ‘private equity’ in the way we understand it today did not exist,” Gantner recalls. “It was called Risikokapital, risk capital, which was associated with venture capital.”
The founding trio all worked at Goldman Sachs in Zurich, but Erni was the only one with direct deal-making experience; Wietlisbach and Gantner were on the institutional sales desk. To walk away from the promise of a settled, lucrative career at what was then the world’s preeminent investment bank for the hard slog of establishing a name in an asset class with little following in Europe represented a major gamble. Gantner, now 45, was 27 at the time; Erni and Wietlisbach were three and seven years older, respectively. “Urs had more to lose because he was the darling of Roy Zuckerberg,” says Gantner, referring to the legendary Goldman partner who at the time of his retirement in 1998 was the bank’s single largest shareholder. Gantner and Erni broke away first, setting up shop in a 300-square-foot office filled with poorly assembled Ikea desks; Wietlisbach joined a few months later, convinced that the three of them could forge a successful dynamic. Each founder contributed an equal share to the initial pool of $100,000 in capital and brought a different strength to the firm. Erni was the technical master, giving the operation the analytical rigor it needed to sift through investment opportunities; Wietlisbach handled sales; and Gantner was the ultimate motivator, “the kind of guy who can rally the troops and get people excited,” as Wietlisbach puts it. “If you wanted the perfect entrepreneur, you’d put us together.”
Unlike the big U.S. firms, which competed by trying to find the most-lucrative deals, the threesome took a client-centric approach: talking to potential investors, understanding their specific needs and coming up with structures that met those needs. In 1997 they launched a $150 million small- and midcap fund focused on investments in German-speaking Europe; it attracted interest from the region’s pension funds and insurance companies. The founders quickly followed that with a $400 million fund of funds that, in Gantner’s words, “sold like hotcakes.” In 1998, Partners helped kick-start the secondary private equity market by completing, in conjunction with Jeremy Coller of Coller Capital, the purchase of the private equity portfolio of Royal Dutch Shell’s U.S. pension fund for $265 million — the largest secondary transaction of its time. The commitment to secondaries has strengthened over the years and is one of the features that continues to set Partners apart from its larger peers in the U.K. and the U.S. “One of the fundamental beliefs we have is that if you buy large-cap, in four out of five times it’s cheaper in the secondary market than doing it directly — and you end with a better IRR,” Wietlisbach says. “That’s always a provocative statement when I’m sitting with my large-cap friends.”
For the founders the takeaway from the early years was simple: There is a major market advantage in adopting a multistrategy approach to private equity investing. Today the firm invests in companies directly or with equity partners (accounting for 37 percent of all allocations), it has a fund-of-funds business that makes primary investments in other managers (27 percent), and it invests in the secondary market (36 percent).
That triangulated approach of making direct, primary and secondary investments is consistent across the four sectors in which the firm is active: private equity, debt, infrastructure and real estate. The strategy allows Partners to offer investors a level of customization that few other firms can match. More than 20 percent of assets under management, or $9.6 billion, are held in separate accounts, enough to make Partners one of the leaders in the industry trend away from commingled funds. BlackRock Private Equity Partners, by comparison, has $9.3 billion in separate accounts, according to London-based data firm Preqin; Hamilton Lane tops the market with $18.9 billion.
The returns Partners has achieved have been impressive. The average annual return since 2000 is 12 percent, while the cumulative return over that period is 355 percent, meaning that the firm has outperformed the broader private equity industry by 29 percentage points. In the private equity group, which accounts for $24.3 billion of its total $43.7 billion under management, Partners has generated a 25 percent annualized return and a 2.7 multiple on investors’ funds on all its realized and partly realized small- and midcap direct investments since 1999. Apax, to make one point of comparison, has generated a money multiple of 2.8 on all its direct investments since 1993. Meanwhile, investments in mature secondary programs have reaped an annualized return of 23 percent. “We will never stop doing primaries, as it provides us with all necessary insights into the market, making us ‘legal insiders’ and better-informed investors on the direct and secondary side,” Wietlisbach says.
North America and Europe remain the focus of activity, accounting for 42 and 44 percent, respectively, of the $7.7 billion invested last year. The firm’s most significant exit of 2013 was the sale of AHT Cooling Systems, an Austrian company acquired in 2007, to Bridgepoint Advisers for $800 million, with the investment generating a return of 25 percent. Partners teamed up in February with Starr Investment Holdings, the investment vehicle run by former American International Group boss Maurice Greenberg, to lead the consortium that bought MultiPlan, a major U.S. health insurance claims processor, in a deal that reportedly valued the company at $4.4 billion.
But it’s in Asia and the emerging markets that the firm is seeing its strongest growth. In February, Partners made its first major infrastructure investment in Latin America, paying $750 million for a majority stake in Fermaca, a leading natural-gas-pipeline operator in Mexico. In May the firm opened an office in Mumbai.
Since its founding Partners has diligently built up a database to track the performance of each manager and portfolio company in its fund-of-funds business. That data is now available to all of the firm’s investors as they are sizing up new opportunities. According to Penny Green, chief executive of Superannuation Arrangements of the University of London, which has $3.2 billion in assets and has been investing with Partners since 2007, no other private equity firm offers that same depth of data. “Others are now starting to wake up and build their own databases, but Partners has an unbeatable head start because they already have all the history built into their data,” she says.
Partners’ incentive structure also appeals to investors. Performance bonuses are not distributed until the fifth or sixth year of an investment program — a logical approach in an asset class where capital can sit idle for years, but one that remains relatively uncommon. Phillip Vitale, chief investment officer at Filament, a Seattle-based wealth management firm with $1.3 billion in assets, describes this as “a real differentiator and a very strong statement of partnership between the firm and its clients,” of which Filament is one. That alignment of incentives carries over into the approach Partners takes to distributing carry among its employees: The firm’s global carry pool accounts for 30 percent of each employee’s annual bonus, in contrast to other large private equity houses, where, according to Gantner, “there’s no shared economics across unrelated groups.” Common incentives create an impetus for cooperation across different teams, he says.
Within the next couple of years, Partners hopes to be a firm with more than 1,000 people and offices in 20 locations, up from 17 today, deploying an average of $10 billion a year over the course of a six- to seven-year investment cycle. Sourcing talent is not a problem: Gantner says the firm received 12,000 job applications last year. The challenge is whether Partners will be able to reach its targets while maintaining its identity. The signature flexibility of the firm’s investment approach relies on its cohesiveness and close cooperation among its business lines, which could become more difficult to manage as the group expands.
Simultaneously, pressures in the market have conspired to make this a particularly fraught time for any firm scouring for investment opportunities. Leverage and valuations are increasing, giving today’s private equity market contours very similar to those that prevailed in the run-up to the 2008–’09 crisis. Resisting the herding and animal spirits that come with a bull market, especially in the midst of a comparatively brisk expansion drive, will not be easy.
“Nobody is immune to asset inflation,” says Americas chairman Dallara. “It is everywhere, and I’ll be stunned if we come back in five years and find that we haven’t been caught up in one piece of this or another.” But, he says, the firm’s continuing fund-of-funds business gives it visibility into a huge range of small- and midcap corporations, providing both a source of off-market investment opportunities and a solid cushion against the valuation pressures that come with auctions. Last year’s acquisition of Hofmann Menü-Manufaktur, a German midmarket catering company employing more than 1,000 people, was an off-market deal, Dallara says. “Competitive auctions still provide opportunities for us, but that’s where you get caught up in bidding wars,” he says. “You’re not going to see us competing head-to-head with KKR for Dell. The world’s largest GPs — the big, bulky competitors — don’t have insight into quite the range of nontraditional sourcing opportunities that we do.”
In secondary investments Partners can draw on its experience during the last bubble in asset valuations, in 2006–’07. At the time, there were only two main strategies in the secondary market: buying low-quality portfolios at low prices and buying high-quality portfolios at high prices. Partners tried both and found that the latter was comfortably superior. In 2006 the firm bought, for a 50 percent premium to net asset value, a $31.6 million portion of a Clayton, Dubilier & Rice fund, having determined via its fund-of-funds database that the companies in the portfolio had created significant value while the fund still held them at cost. Last year Partners exited its commitment, having generated a return of 64 percent and a money multiple of 1.82. This suggests that a similar strategy could be usefully adopted today. “Having a deep bank of historical data is extremely helpful when confronting these types of marketwide precedents,” says Gantner.
But other sectors call for just the opposite strategy. Real estate is a case in point. “Two years ago everyone wanted to be in Germany and the Nordics and nowhere else,” says Claude Angeloz, co-head of the private real estate group. “Now everyone is running back to Spain and the emerging markets because they think valuations are too high. But there’s no need to be extreme and do all this esoteric stuff straight away.” With prime real estate in top tier cities heavily overvalued and the “esoteric” periphery still too risky, Partners is training its focus on the overlooked middle of the market, in second tier locations in the advanced economies, where cap rates are often much lower than in top tier locations. A country likes France has a surprisingly inactive real estate investment market outside of Paris, but Angeloz says there is much opportunity to be had with simple refurbishment of assets in second tier cities. “It’s not magic; all you need is a little bit of capex and you can get significant pops on the rent,” he says. While many other big PE shops have been busy snapping up trophy assets in New York and London, Partners invested into a commercial development in the distinctly unglamorous location of Parramatta, in the sweltering western suburbs of Sydney.
For a private equity industry known for its swagger and outsized personalities, Partners’ approach is methodical if not downright boring. Yet it’s that sober style, as much as the flexibility of the firm’s multisector, multivehicle investment strategy, that should guarantee it remains true to its founding character as its expands. Wuffli speaks of the deterioration he witnessed at UBS as “a creeping process of starting to believe we were actually as good as we were made out to be by outside perception,” which eventually lured the bank into a disastrously aggressive expansion of its fixed-income business. Partners seems in little danger of falling prey to complacency. The firm knows what it is good at, and its future promises more of the same: a focus on small- to midcap companies, a flexible cycling in and out of the secondaries market and a scouring of the fund-of-funds world for off-market opportunities. Gantner calls this “looking for hidden mushrooms.” That sounds like a recipe for magic, but he’d be the first one to tell you that it’s not. • •