In an industry that prides itself on keeping a low profile, Jeremy Coller is one of the most talked about secondary investors in the game. That comes from heading up the firm with the largest secondary fund in the world, as well as being more eccentric than your average private equity investor. A vegetarian who doesn’t wear leather or silk due to his objections over the treatment of animals, Coller has been known to frequent holistic health resorts.
He grew up poor and lost his father at a young age, but that didn’t snuff out his desire to make his mark. He earned a bachelor’s degree in management sciences from Manchester School of Management and a master’s degree in philosophy from Sussex University. He went on to study at the Sorbonne in France, but he left after a year, eager to start his career.
His took a job as a fund manager with Target months before it was sold to Morgan Greenfell. He later became an investment analyst at Fidelity International and served as venture capital and buyout manager at ICI Investment Management. He struck out on his own in 1990, young enough to believe that he could start his own secondary firm. Four years later he had $80 million in commitments and his London-based firm was on the fast track.
Just last year, Coller closed his seventh fund, Coller International Partners IV, with $2.5 billion (it now stands at $2.6 billion), making it the largest secondary fund in history. About 45% of the fund’s commitments come from North America, with a little less than 40% from Europe and the remaining 15% stemming from other investors worldwide.
Nine U.S. state pension funds invested in the CIP IV fund, four sovereign investment authorities and six university endowments. Six of the fund’s investors, including the University of Michigan, committed $100 million or more.
Now Coller is making a name for himself on this side of the pond. Coller Capital has closed some high-profile deals in the last few years in the United States. It bought more than three-fourths of the investment portfolio of Lucent Technologies’ Bell Labs in late 2001 for about $100 million. Within six months, the firm sold one company from that portfolio, Celiant, for $470 million.
Coller took time out to meet with VCJ when he was in town helping to expand his firm’s office in New York and to close an important secondary purchase. We spoke over breakfast at Oscar’s, a bustling restaurant in the Waldorf Astoria. Coller looks younger than his 44 years and is energetic, even at 7:30 a.m. He was anxious to talk about the market, answering questions with a crisp English accent.
What significant changes are taking place in secondary markets?
It’s been predicted that the secondary equities market will be massive, and it’s certainly true that a massive amount of capital has been raised by secondary equities funds, including ours-a total of about $6 billion last year alone, about $2 billion the year before that, and an estimated $6.5 billion this year.
There’s about $12 billion in capital out there for secondaries deals, available just from the professional secondary players. You’re also going to see institutions such as pension plans, which have already come into the market, doing secondaries deals.
Everyone would like to say there are going to be a lot of sellers out there and that an explosion in the market is just about to happen. And yet we’re seeing banks, for instance, at the moment, making secondary deals. And with the rise in the equity market their balance sheets are improving.
Are there sellers on the market now you haven’t seen before?
Most sellers are one-time sellers. Once they’ve sold, they’re out. They made the asset allocation decision to be out of private equity, rather than just reduced. That could be for regulatory reasons or for strategic reasons. The typical sale is of a group that decides that the asset class is not for them anymore. There are fund groups that have done multiple sales over a number of years and they typically sell to the same group.
How has the increased number of funds changed the market?
It’s true that there are a lot of secondary funds out there. All secondary funds up to 1999 had not made a loss. Think about it: Not one secondary fund up until 1999 had made a loss. Then you look at the performance of secondary funds last year and this year and you see that most of those that were raised in the last four years are moving toward negative territory if they haven’t already done so.
So the market has definitely changed?
I used to hear the market characterized as “dumb sellers and smart buyers.” Now it’s shifted to “smart sellers and dumb buyers.”
A pension plan told me a couple of years ago that they would only invest in venture and not buyouts because venture is [returning money] so much quicker [laughs]. That’s a true story, unbelievably. Mind boggling.
How do you make sure that in your rush to invest you don’t end up doing dumb deals?
You have to have integrity and pay fair prices. That’s our job. We look at every set of assets opportunistically and price them. We’ve got a huge database of most funds so we can get very quick pricing, which is a huge advantage when someone wants to sell and wants to sell with confidence and be respected in the marketplace.
But you’ve been accused of overpaying.
We’ve often been accused of that, which I think has been very unfair. Our goal is to completely invest our new fund very fast. That’s what our investors pay us for. Sincerely, there’s a lot of pressure on us from our investors to be invested. It’s a big part of our attraction to them. Our objective is to have the fund fully invested sometime next year.
Is it difficult to maintain the largest secondary fund in history?
We’re very hungry to remain the market leader. We’ve only just become the leader in secondaries globally, and that’s a very precarious position. We don’t want to lose it, either in the short-term or long-term.
Your company has changed since you first started. What’s been the biggest difference?
I’m from a pension fund background myself. And when we started the business in 1990, sponsored by Barings, it didn’t take us three or six months, but four years to raise our first fund. It was a very humbling experience. There was no capital. We had been given a loan by our sponsor, Baring Brothers, of $150 million, which was meant to last six months, and they were very pleased when we are able to make it last three years.
I come from a poor family. My father died when I was 10 and his business went bust. So I’m very respectful of the value of the money we’re given to invest, and how hard it is to gain the confidence of an investor. You can see in this marketplace how easy it is to lose.
So has the market become so over-saturated with capital that secondary buyers are doing a lot of dumb things?
Actually today we are seeing a lot more caution in the private equity secondaries market. The jury’s still out on where things are headed and how it will turn out. Warren Buffett put it very nicely when he said, “When the tide goes out, you see who’s wearing trunks.” The performances of most secondary funds have been very disappointing. It’s just slower to come through than a venture fund. And so there have been a lot of smart sellers out there. It’s now becoming more of a traditional market. As I’ve said, there’s been a lot of capital raised by us and others. We intend to be the fastest investor of $2.6 billion ever. It will take tremendous discipline to do that well and quickly. That’s what investors pay us for, to invest well and with speed.
The cost of capital is so much more expensive, affecting performance. How has that affected activity?
For the pension plans, which may have suddenly matured as their business has contracted, the cost of capital has been a disappointment. If a group started investing in 1999 in private equity funds, then they could certainly be forgiven for saying, today, that they can’t stomach the long-term nature and the cyclical downturns and upswings of private equity, and the length of time it takes for there to be any performance within it.
How does the market in Europe differ from the United States?
In the U.S., over 60% of the capital provided for private equity has been from pension plans, endowments and foundations. The rest is provided by banks and insurance companies. In Europe the vast majority of capital has been provided by banks and a relatively smaller amount by pension plans. There’s a difference in where the supply can come from.
What about the language or cultural differences? Do those come into play here in the United States as opposed to Europe?
There are a lot of different nationalities, different languages and different cultures in Europe. As much as Texas may be a completely different world compared to New York, there’s still a fairly common heritage and the same language, just about.
Are the reasons changing for why sellers are selling?
A lot of sellers are tactical sellers. They think it’s the top of the market and it’s a good window to get out. There’s a very strong argument to say that funds that were raised three or four years ago with an uplift in the market would be a perfect opportunity for the groups to say, “You know, I bet this market deflates over the next couple of years, so let’s get out now.”
Is the secondary market going to become more transparent?
The more people enter this business, the more investors it will have and the more transparent it should and will be. There’s no reason to be embarrassed about selling or buying. It’s a natural consequence of any large pool of capital, whether it’s the housing market, the bond market or the private equity market. The fact is that general partners are increasingly embracing the secondaries market as they realize that it’s more risky to keep limited partners who don’t want to be there, than to let them sell their position in a secondary sale.
How has the balance of power shifting toward limited partners changed the secondary business?
There’s always been tremendous pressure because people want to know they’re getting value for money. You’re seeing it heightened at the moment within the venture community. It’s ironic. I don’t know of any venture fund that persuaded investors to increase their carry to 25% or 30% and that is now actually going to earn the carry on those funds. It was at a bubble in the market and they’re seeing the funds cut now. Institutions are taking that leverage they’ve got very seriously as capital contracts in the market.
So, it’s all about delivering on the promises you make to your investor?
We’re seeing a breakdown of that now. The private equity market was a wonderful market in the 80s and early 90s. You saw tremendous institutional integrity from general partners. There is no question we’re just about to go through a period where that’s broken down. As part of the exuberance of the market, you’ve probably got about 25% of general partners today that shouldn’t be in business-and they know it.
Did you find it necessary for survival to make significant changes to your fund structure to raise your last fund?
We kept our structure pretty much the same. Private equity is a unique structure, and so is the whole asset allocation market. Everyone talks about public markets being liquid. What’s interesting is that private equity is unique in the sense that when you have a fund, you get investors for it, and that fund is self-liquidating. To survive, to not go extinct, you need a fund two, a fund three, and so on that bring your existing investors with you from fund to fund, as well as attract new investors.
Sounds like survival of the fittest. Is it?
It’s very hard to kill a venture capitalist, as the market’s finding out now, because of the structure of the funds. But they do go extinct eventually. What investors want to know is that they’re going to get high investment returns relative to whatever benchmark they’re using and can invest with confidence in a consistent team operating as a meritocracy.