Lou Moelchert doesn’t fall prey to fads, and he never goes for broke. It’s why his asset management firm, Private Advisors, is steering clear of venture capital for now, he says, favoring small buyout shops and hedge funds instead.
“I wouldn’t say the venture capital model is broken, but we think it takes a certain type of equity market to get the exits you need to rationalize the risk, and we don’t see that in this market environment.”
Moelchert’s cautious style informs Private Advisors, which manages $3 billion in hedge fund assets, and $1 billion across two private equity funds of funds. (Private Advisors’ third private equity fund of funds is about to close on an undisclosed amount, according to one of its own limited partners.)
Moelchert is quick to say that venture capital has treated him well in the past. The 66-year-old was schooled as an LP, literally, at the University of Richmond, whose endowment he helped grow from $50 million in 1975 to $1.2 billion in 2006.
It’s not the searing, well-documented, explosion in assets that Harvard University and Stanford University have enjoyed, but the performance consistently placed Richmond in the top 50 among the nearly 800 college and university endowments tracked by the National Association of College and University Business Officers.
Richmond’s administrators were so happy with Moelchert’s approach, in fact, that when he formed Private Advisors in 1997, they asked him to continue managing the endowment concurrently. Only when the assets of his own firm demanded his full-time attention did Moelchert insist that the school find a replacement.
Moelchert credits venture capital in part for his success. “It became clear to me in the early ‘80s that the so-called riskier, alternative assets, including venture capital, were less volatile and offered higher rates of returns because the most talented managers were moving over to [manage] them,” he says.
Yet Moelchert also cautions that “to be successful over time, you have to be more concerned about losing too much money in the downturn than in shooting out the lights during a bubble.”
He paid a price for that lesson at Private Advisors, which backed two venture funds whose performance was less than stellar: the $350 million vintage 1999 fund of ComVentures and a $200 million first-time fund from a firm called Infinity Capital Partners.
I wouldn’t say the venture capital model is broken, but we think it takes a certain type of equity market to get the exits you need to rationalize the risk, and we don’t see that in this market environment.”
Louis W. Moelchert Jr.
Private Advisors has fared much better with its focus on small buyout shops. Moelchert likes that segment of the market because: “If you find talented GPs, you get venture-like returns for significantly less risk.”
He says thinks small buyout fund GPs can have a more direct impact in helping their portfolio companies mature and reach the next level than they could were they dealing with larger, lumbering entities.
Private Advisors is selective. Of the slightly more than 700 funds that meet its investing criteria, Private Advisors examines the PPMs of between 70 to 90 funds every year, and commits to between five and eight. On average, its GPs manage around $230 million in assets.
The seven-person investing team of Private Advisors has also distinct likes and dislikes. If a fund is managing assets that are out of favor, for example, the team is all ears. Moelchert points to Denver-based Resource Capital, which specializes in mining and natural resources. Though its managers came of out the global investment bank N.M. Rothschild & Sons in 1998, they had trouble drumming up interest in the midst of the dot-com craze. They got through to Moelchert, though, and today, Private Advisors—which has enjoyed “exceptional returns” from its involvement with the firm—is the firm’s biggest investor.
Moelchert also likes managers who know about investing in a downturn. “In today’s market, we really believe that if we aren’t in a recession, we’re very near,” he says. “So we’re tending to focus on partnerships that can work with companies experiencing difficulty.”
Naturally, too, Private Advisors tries to identify talented teams. Moelchert says he found one in Chicago-based Roundtable Healthcare Partners, whose managers came out of Baxter Healthcare Corp. six years ago and have also produced strong rates of return for Private Advisors.
Given Moelchert’s moderate philosophy, Private Advisors is far less enthusiastic about emerging managers unless they’ve spun out of a previous partnership with a good track record. “We’d be very leery of backing a new team that hasn’t invested together before,” he says. “It would take a pretty special situation.”
Funds that have inched up from the small end of the marketplace need not apply, either. Moelchert much prefers the “large group of fund managers who know what their expertise is and decided to stay [small] and didn’t grow assets under management in recent years just because they could.”
As someone whose been around the block a time or two, Moelchert has developed a nose for managers who “call in rich.” As he explains it: “If they make so much money that we sense they aren’t as engaged as they used to be or that their motivations have changed, we’ll move on” to other fund managers.
To be successful over time, you have to be more concerned about losing too much money in the downturn than in shooting out the lights during a bubble.”
Louis W. Moelchert Jr.
Indeed, Private Advisors once fired a GP, and led the firm’s other LPs to take over the partnership and wind it down. “We had a fiduciary responsibility to our own LPs,” Moelchert says, declining to reveal the name of the firm or whether it was a VC or buyout shop.
Private Advisors isn’t too conservative to listen to consultants who’ve told it to broaden its business abroad. The firm is currently building a team of investing professionals to manage two new funds of funds: one with a global mandate and one focused strictly on European buyout managers. Both will be primarily managed out of London, in an office headed by Jens Bisgaard-Frantzen.
Bisgaard-Frantzen founded and served as the longtime CEO of ATP Private Equity Partners, Denmark’s largest institutional investor, with assets of roughly $65 billion. His three-person team will be joined by another two managers, who’ve yet to be hired, and who will be based in Richmond. The global fund will have a target of between $600 million and $800 million. The European fund is expected to be around half that size.
PROFILE
Private Advisors
www.privateadvisors.com
Founded: 1997
Location: Richmond, Va.
Assets under management:
$1B in two private equity FoFs and $3 billion in hedge fund assets.
Board of directors: Louis W. Moelchert Jr., co-founder and managing partner, Rafael Astruc, co-founder and partner, Charles M. Johnson III, partner, Louis W. Moelchert III, partner.
Source: VCJ reporting
