Two decades ago, Jeremy Coller’s entrepreneurial drive helped to create one of the world’s biggest secondaries platforms. Today, Coller Capital is a bigger, more institutional firm but there are still signs of that stubborn unwillingness to follow the crowd.
It’s 16 years now since Jeremy Coller did the deal that first caused the world of private equity to sit up and take notice: the daring acquisition of a $265 million portfolio of limited partnership interests from Shell’s US Pensions Trust, which his eponymous firm Coller Capital completed in 1998.
It was daring in part because secondaries as a strategy was still a blip on the radar of most institutional investors; many LPs (including some of Coller’s own investors) thought the market would be a short-lived phenomenon that would disappear within a decade. But it was also daring because of its sheer size: at the time it was the biggest single secondaries transaction on record, and it meant Coller had effectively bet the whole of his $240 million second fund on a single deal.
Happily for Coller, the bet paid off. And it proved to be the first step in an impressive growth story: 16 years on, Coller Capital is one of the world’s biggest and most important secondaries specialists, having raised almost $14 billion across six funds (a seventh is expected soon, of which more later). Meanwhile the secondaries market has not only survived but thrived: transaction volumes are expected to hit the $30 billion mark this year for the first time.
Coller himself remains in situ as chief investment officer, but he’s handed over the day-to-day running of the firm to Tim Jones, who has been with the firm since 2000 and was promoted to the newly-created role of CEO last year. Together, they oversee a team of about 160 people worldwide, including about 60 investment professionals – a big operation by any standards, but particularly in the secondaries space.
In other words, the Coller Capital of today is a very different beast to that of 1998. Gone are the days when the CIO might bet the house on a particular deal; today there’s far more talk of institutionalisation, and talent management, and best governance practice, and so on.
But as the secondaries market gets more competitive, and rivals raise even bigger funds, does Coller Capital still have enough of a spark to stand out from the crowd? In August, Secondaries Investor‘s sister publication Private Equity International went to see Coller and Jones in their London office to try and find out.
Banking on complexity
Most people in private equity seem to know Jeremy Coller, or at least know of him. He’s generally perceived as a maverick who’s not afraid to speak his mind (most people, including your correspondents, appear to have experienced him telling at least one joke not fit for reproduction in a family private equity magazine).
On this particular occasion, however, he’s in a quieter, more contemplative mood; he lets Jones do most of the talking, which the latter seems happy to do (though when the former does choose to interject, there’s no question who’s still in charge). That’s perhaps in keeping with the lower public profile Coller has maintained in recent years; he’s rarely given interviews, leaving most of the front-man stuff to his new CEO.
We start by talking strategy. What exactly is it that makes Coller Capital different these days?
“Most of the market is focused on simple purchases of fund positions – the kind of ‘plain vanilla’ deal you get when a pension fund auctions a fund book,” says Coller. “In those situations whoever writes the largest cheque gets the deal. [But] we’ve not bought from pension plans since the start of 2007 or so; we play at the more complex end of the market. Our thesis is: everyone else is building over there, so let’s build over here.”
So what does this actually mean, in practice? For the most recent fund – the $5.5 billion Coller International Partners VI, which closed in 2012 – a major focus has been on doing deals with banks that are trying to offload private equity assets, usually for regulatory reasons.
“Private equity is just a pimple on the balance sheets of these banks, but for our needs it’s plenty big enough,” says Jones. “And banks face numerous issues in disposing of it, from team incentives to accounting for goodwill. So it’s always complex.”
One recent example was a deal with Italy’s Banca Monte dei Paschi di Siena, supposedly the oldest bank in the world. “[The bank] operated right across the EU and also had its own direct investing business, so there were all sorts of complications around how the assets were held and by whom,” Jones explains. “They knew these assets were non-core and, in the current environment, they knew they should dispose of them – but they didn’t know how to do it, because nobody in Italy had ever done this kind of transaction before. That deal took three or four months of problem-solving.”
These complex deals are only possible for certain groups, he claims. “There are some firms willing and able to do these transactions, and others that can’t or won’t. Over the years we’ve built a great reputation as partners who can help banks cut through the challenges.”
The firm’s whole strategy is built around relationships, he says. “Building relationships with key participants gives you insight as to what they own, and what issues they’re likely to have when it comes to selling the portfolio. It’s not always just about price; the more you understand, the more you become a real partner, rather than just a buyer. That’s why we get to work with the same institutions multiple times: we get invited back, because they see us as a partner that helps them solve their problems.”
Indeed, one advantage of complex transactions is that they’re less susceptible to the sort of price inflation evident in some areas of the secondary market at the moment (whereby some LP portfolios have been changing hands at par or even at a premium to net asset value). That’s less of an issue in this part of the market, not least because it’s harder for primary investors to play in it. “Complexity narrows the number of competitors,” says Jones. “It’s not that there is no pricing pressure – sellers always want a good price – but it’s more about providing solutions that the seller believes you can execute on.”
For the banks, he adds, a big issue is confidence of closure: they don’t want the deal to fall over at the last minute. That means they always look to teams that have successfully done this kind of purchase before. For a firm like Coller, that creates a virtuous circle.
Scale is clearly important in all this. In fact, for Coller, scale has now become an important point of difference for his firm. “In the last quarter of last year, we closed six large transactions with an average size of $150 million each – each led by a different member of the team.” This is something rival firms just couldn’t match, he suggests.
“We had one deal in the US that took a year from handshake to signature, and we had between four and ten people working on it at any one time,” adds Jones. “If you have a total team size of 10, you can’t really do that.”
And it’s not just about deal-makers, either. Risk and compliance has become a much bigger focus, too. “We have three partners now who focus on risk management for the investment process. Every note that comes to the investment committee includes their thoughts, as well as those of the deal team. I don’t know of any other firm – secondaries or otherwise – that does this.” The firm has also embedded three lawyers in its deal execution team.
“If you can show you really understand the complexity around legal risk – the maze that is transfer and pre-emption rights, for example – it gives the seller a lot of comfort.”
Banks have long been a good source of deal flow for the firm – ever since 2000, when Coller led the acquisition of a portfolio of interests from the UK’s NatWest bank in what became the first ever $1 billion+ secondaries transaction. And since most European banks are arguably still under-capitalised and over-leveraged, this is not a trend that’s likely to go away any time soon.
That said, the firm is by no means only just interested in bank-owned assets. In fact, it’s prepared to consider a wide range of potential deals as long as they meet the firm’s return criteria (which Coller and Jones won’t specify, except to say that it involves balancing the likely multiple, IRR and cash-on-cash).
“We buy portfolios of assets to generate the return we’re looking for; we’re relatively agnostic about what those assets are,” says Coller. “As far as types of investment go, we’re constantly redefining the market. We have a very broad view of the world. We experiment and innovate, but only in proportion – we’re never betting half the fund.”
What this means is that the firm can adjust its buying strategy depending on market conditions. This doesn’t always work: for instance, a $100 million move into IP secondaries didn’t go anywhere, so the firm sold the portfolio and ditched the strategy.
But particularly in recent years, Coller has had a lot more hits than misses.
Back in 2009, it started buying up cut-price CLOs, after joining forces with a team of people who had put them together in the first place; according to a source close to the deal, Coller was able to sell a year later for an IRR of almost 70 percent.
The same year, Coller sprung another surprise by acquiring a stake in struggling listed fund SVG Capital, which effectively allowed the firm to gain access to buyout firm Permira’s funds at a deep discount. Five years later, the stake that Coller bought for about $89 million is now worth a whopping $435 million – meaning the firm is sitting on a return of about 4.9x all in, with most of its capital already back.
According to Jones, this deal is a particularly good example of how Coller’s “entrepreneurial spirit” allows it to “think outside the box”. And it all emanates from the way its founder built the business, he says. “Most secondaries platforms came out of funds of funds, so they were institutionalised from day one. But Jeremy built this one himself – and the firm still has that entrepreneurial DNA as a result.”
But is it really possible to build the sort of institutional scale and governance that today’s LPs demand, and still be entrepreneurial?
In Coller’s view, this is at least partly a people issue – an area where, by its own admission, the firm has sometimes struggled. It went through a phase of losing some good people in a relatively short period, which always makes investors nervous.
“We made some mistakes early on in the way we assembled and built the team,” Jones admits. “I think we did lose some good people – though that’s not something that’s happened to us for some time.” Things are different now, he insists. The firm now has a dedicated talent management function, which every year runs a day-long simulation that allows junior dealmakers to act as partners on a mock deal. It’s all geared towards trying to identify future stars (and, by implication, the no-hopers) much earlier.
That said, he still thinks the industry as a whole gets far too hung up on turnover. “The trouble is that partners who don’t retire become blockers; or if they don’t perform, firms are afraid to manage them out. We recruit associates at the age of 28-30 who we think will make partners – but no amount of interviewing and testing can ensure that. Our view is that you have to manage turnover actively.”
About seven or eight years ago, the firm also made a conscious decision to stop hiring partners externally and focus on growing its own instead, specifically in the hope of retaining that original culture of enterprise. The danger with this approach, of course, is that the firm ends up being too homogenous. But Jones says it has addressed this via its junior-level recruitment. “At first we did have a phase of recruiting lookalikes. But we changed it so that we took more risks. You need a certain amount of sparky, off-the-wall whackiness to keep that entrepreneurial flair.” He admits this took a while to get right, but he believes it’s “paying dividends” today.”
The firm has also changed its governance model. There was a time when all the partners got to vote on investment decisions; but as the partnership got into double figures, this arrangement became unwieldy. Now only Coller and Jones get to vote, along with a third partner chosen in rotation. When decisions are made by committee, there’s a tendency towards conservatism; according to Coller, the new set-up makes it easier to sign off on riskier, more entrepreneurial deals like SVG.
It’s worth noting that Coller has retained power of veto over all investments, so he can always pull the plug on anything he doesn’t like (though it doesn’t work the other way: he can’t overrule the other two to make a deal happen). So for all the undoubted progress in improving governance and opening up the investment committee – supposedly anyone can come along, and questions are encouraged – there’s no question that the founder remains the most important voice around the table. He also continues to control most of the management company. Does that make some LPs nervous, we ask – either about the concentration of power, or its potential ability to retain key staff?
“What gives the market comfort is that we’ve built a successful platform,” says Jones (with a hint of irritation). “And after some turnover in our early years, we’ve had good retention of the core members of the team. So people are very comfortable that something’s working here. Maybe it’s not a conventional business model – but our counterparties keep seeing the same faces because people like working at Coller. Whether or not they have equity, they are part of the management of the firm. That’s what attracts people here and keeps them here.”
Coller points out that even if the ownership of the GP is closely held, its investment profits are not. “The carry pool is spread out through the whole investment team on a very equitable basis; even new joiners get it.”
So what next for Coller? A new fund is expected in the not-too-distant future. Coller and Jones declined to comment on fundraising, for the usual tedious reasons. But according to LP sources, Fund VI is now about 80 percent invested, which means that we’re probably going to see the launch of Coller International Partners VII either later this year or early next.
What also seems clear is that Coller Capital will continue to be one of the only big firms on the market that only has a single fund. Coller himself accepts that there are some limitations to this approach – notably that it has nowhere to put certain types of assets with a different return profile, like infrastructure and real estate for example.
But he argues that it creates more focus within the team (not to mention better alignment with LPs). As he puts it: “We believe multiple products would be a distraction from our core business”. And with a ‘single fund’ model, he adds, every deal competes for attention and investment with every other deal – so if one type of asset looks unattractive at a particular time, the firm can switch to something else.
One thing you almost certainly won’t see, however, barring a remarkable volte-face, is the firm taking on separate account relationships. Coller himself has been vocal about the conflicts inherent in these arrangements – and it would seem to clash with that oft-stated desire to keep its strategy as flexible as possible.
Co-investment opportunities are a possibility. Again, they’re nervous about its distorting effects on strategy at other GPs. But if an LP is bringing something to the table other than the money – perhaps the original lead, or some sort of sector expertise – it may be a different story. As Jones puts it: “We can do it, but only on a partnership basis.”
The next fund may also end up doing more deals in Asia, where the firm has now established a Hong Kong base. “We’re not active buyers there on the scale that we are in the rest of the world, because the pool of capital is still quite young,” admits Jones. “But one of our very recent investments – which we haven’t announced – is in Asia, and is in fact one of the largest Asian secondaries ever done.”
What about leverage? “The whole secondaries market uses leverage in some form, whatever they might say, and they have done for quite a long time,” Jones fires back. “For us, leverage is a tool in the toolkit, not a strategy – and we don’t use it against assets. Leverage can make sense, but it is sometimes over-used as a way to justify an investment.”
The likely size of the new fund is an intriguing question. For years, Coller and his firm have done the biggest deals and raised the biggest funds in the secondaries space. And while it’s probably still the biggest firm in terms of investment resource, in an era when the likes of Ardian and Lexington Partners are raising $10 billion funds, it is no longer in the highest echelon in terms of firepower. Will it be tempted to redress that with its next fundraise – particularly since it has managed to spend its last $5.5 billion fund in less than three years?
Interestingly, market sources seem to think not; the consensus is that the firm has no intention of trying to raise the biggest secondaries fund on the market, and will instead look to raise a vehicle that is not substantially larger than Fund VI. Raising a $10 billion fund, they suggest, would force Coller to play in parts of the market where it doesn’t necessarily want to be, like the big portfolio auctions.
Again, Coller refuses to be drawn either way. But what comes across loud and clear is that he doesn’t like the idea of being constrained – either by the size of his fund, by LP demands, or even by market norms. “What we’ve tried to do is look at the conditions that will enable us to have a consistent pace of investment. For us, that’s having the largest team in the world dedicated to secondaries and therefore, we hope, the most dealflow. But we believe investment pace should never be forced: if we think we need to sit on our hands for a bit because of market conditions, we will.”
He may be at the head of a big institution now. But he’s still marching to his own tune.
Coller Capital in numbers
Size of current fund
Investment professionals at Coller
Value of secondary market deals in 2005
Projected value of secondary market deals in 2014 (Cogent)
Coller’s current return on SVG investment