ALT Assets Interview

Institutional Investor Profile: Alex Bangash, managing director, Rumson Capital

14/06/2004. Source: AltAssets.

Bangash on a changing of guards in the venture market, on identifying the
franchise funds of the future, on the importance of self knowledge and on
keeping an open mind.

Rumson Capital is a US-based alternative investment advisory firm and fund of funds, which differentiates itself on the basis of its deep domain expertise. The
firm invests in the entire spectrum of alternatives including distressed debt, timber, hedge, venture and buy-outs. Rumson's private equity fund of funds
focuses on venture and mid-market buy-out fund opportunities in a wide range of geographies and sectors. Bangash joined Rumson Capital when it was
founded in 2003. He has an extensive scientific and corporate development background in the software, wireless and optical sectors, at a number of companies including AT&T, GE and Bell Labs. The firm has chosen
not to reveal its funds under management.

In what way does Rumson Capital differ to other fund of funds?
'Rumson's philosophy is rather different to that of many other fund of funds in that all of the principals here have extensive operational experience. I think that this is extremely valuable for two reasons. Firstly, our operational savvy allows us to identify potentially outstanding funds that are not necessarily the most obvious or visible investment opportunities, and secondly, we are able to bring a significant depth of domain expertise to a limited partnership, and that makes us very attractive investors to have on board. Either way, our operational expertise gives us a definite edge in the fund of funds business.'

What types of investments do you look for?
'We seek the very best. Ideologically we are agnostic to sector and geography, but we do restrict ourselves to early-stage venture and mid-market buy-out funds. We make sure that we look well beyond our own backyards and we therefore do not concentrate solely on funds that frequent the obvious haunts such as Route 128 and Sandhill Road. We are equally interested in funds focussed on Europe, Israel and even Asia.'

What are you views on the venture capital market at the moment?
'Things are definitely looking up in the venture capital world. I think the clouds are
finally lifting. A number of very high profile venture-backed IPOs have recently taken
place and I think this will help restore confidence in the sector and spur further activity. I also think that we are in the midst of some very interesting times in the venture industry. I think there is going to be a changing of guards in the top venture funds. Not all at the same time and not in all of the firms, but I think we will definitely see some of the franchises that have given us the best returns in the past, start to see their primacy slip. At the same time some other hungrier, smarter, younger groups will come to the fore.'

What about European venture?
'We do invest in European venture funds. Although, as an asset class, European venture is widely disparaged by many LPs, I think it is, in many respects, very underrated. We are keen to seek out talented fund managers that are ready to take on this market.'

What other geographies or sectors do you think are particularly exciting right

'We are finding a lot of good funds in the life sciences and medical devices arena, like every body else. We are also increasingly seeing some very compelling service orientated funds. In terms of geography, in addition to the standard Western European and US markets, we are also very interested in Israel, India and Central and Eastern Europe.'

What size of investment do you typically make?
'We typically invest anywhere from $5m to $20m.'

And how many investments do you tend to make in a year?
'Right now we are looking to make between five and ten investments in a year, but this may increase going forward.'

How do you find out about good investment opportunities?
'Like all other institutional investors we are inundated with PPMs. But we are also very proactive when it comes to identifying good investment opportunities. We aim to identify future top tier funds before anyone else in order to secure a favourable allocation. We have a database through which we try to identify promising funds even before they come to market. We then aim to establish a relationship with those managers in advance of an official launch. Nowadays, even good first time funds are heavily oversubscribed, so a proactive approach is a necessity not a luxury.'

How would you describe your appetite for first time funds?
'They say that optimism is a lack of information and pessimism is a lack of imagination. With that in mind we are cautious but open to the possibility that some of these first time funds will become the industry leaders of the future. And we want to make sure that we catch those that do, in advance of the rush. Many LPs construct an allocation model that restricts them to top tier funds. But I think this is a flawed strategy and unrealistic given the difficulties in accessing big name funds in today's market. The real way to get into the franchise funds is to identify them when they are raising their first, second or third funds and that is what we try to do. So, we do have a significant allocation for emerging managers. But having said that, we set a very high bar when it comes to an unproven team.'

What do you actually look for in a good fund manager?
'We look for teams that provide substantive value to their portfolio companies, teams that bring real operational value to their investments and that act as catalysts for their portfolio companies, propelling them to the next level of development through their networks and their know how. It is rare to find a fund that doesn't claim to inject this kind of value, but in too many instances there is little substance behind the words.

'We are also looking for a cohesive and dynamic team. We like to see an organisation where the sum is greater than the parts. It is good to see a team that has stuck together during the down cycle and that has acted with clear integrity throughout. Sourcing advantages are also certainly very important. We are looking for a team that has proved that it is ahead of the game in identifying new opportunities, and that is creative within its specific investment arena. And last but not least, track record is clearly paramount.'

How do you go about conducting your due diligence?
'Firstly, we use a great deal of quantitative vigour. We like to delve deep into both the realised and unrealised elements of a firm's track record and examine whether, when things have gone wrong, the firm has accurately and wisely written down and written off investments. We are certainly not about to take anything we are told on face value. We also have a matrix which looks at the value-add a firm provides its portfolio companies. 'In addition, we use our extensive network of LPs, GPs and industry executives to conduct extremely thorough reference checks. We hold in depth meetings with a firm's portfolio companies, which more often than not have the most negative take on a firm's activities. We also talk to the firm's competitors. Private equity is a very small world, and when a competitor speaks of a fund in glowing terms, you know you are on to a winner.'

What advice would you give a new investor in private equity?
'The majority of our limited partners are, in fact, new to private equity. My biggest
advice to them is to "know thy self". It is important for an investor to understand both their strengths and weaknesses as an institution. In today's market all the good funds are oversubscribed and these funds are able to pick and choose their LPs. It is therefore important that an investor can add value to the relationship.

'Sometimes your value can be highlighted if you have a great partner, whether it be a fund of funds or a respected consultant. But having said that, the selection of a fund of funds is a minefield in itself. Everyone talks about the huge spread between top quartile and bottom quartile primary funds, but the divergence among fund of funds is, in fact, even greater. Nor would I advise investors to go rushing headlong into the big name top tier fund of funds. LPs are too easily wooed by impressive AUMs. But in fact these large pools of capital are often the cause of substantial problems and conflicts of interest in themselves.'

What is the biggest mistake that you have ever made as an investor in private equity funds?
'It has been said that we hear and comprehend only what we half already know. My challenge has always been not to be blind sided by my pre-existing take on things, but instead to have an open mind. I think this is a common fault. It is very important to remain open to new ideas and to keep your eyes open.'

What do you think is the biggest issue is the private equity market?
'I would have to say the biggest issue that we currently face is the institutionalisation of the private equity industry. And I think this will mean that the standout returns that we have seen in the past will vanish the more the industry standardises. I also think we have reached an inflexion point where the primacy of some of the top mangers is going to slip away and new and exciting manages will emerge in their wake.'

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