Core business: co-investment

When Sun LifeAssetManagement (SLAM), a £40 billion London-based fund manager owned by AXA Sun Life, decided in March 1997 to significantly step up its exposure to European private equity, Paul Whitney had a challenge on his hands.

At the time, Whitney served as SLAM's chief executive with overall responsibility for the group's investment management activities across all asset classes. In addition to being an asset management generalist, however, he knew the practicalities of the private equity business better than most. Whitney, who has a PhD in chemistry, had spent the first two years of his career as a research chemist, then five years as the technical manager of a wood pulp mill in Swaziland before returning to the UK in the late 1970s to study for an MBA. After business school, he became a private equity dealmaker in the Leicester office of 3i.

Over 100 deals later, in 1983, Whitney was headhunted to move to Cinven, the London-based buyout division of the British Coal Pension Fund that he eventually became chairman of. Thereafter, in his role as chief executive of global asset management at Natwest, he oversaw the UK bank's private equity investment division, Natwest Equity Partners, which later became known as Bridgepoint.

When Whitney joined Sun Life in 1995, a captive private equity operation was also part of the mix of businesses that he was responsible for but, with less than £100 million committed to funds advised by Barclays Private Equity, it was small: ?It wasn't even affecting the second decimal point of our performance,? as Whitney recalls. A review was carried out to determine whether the company should either end its private equity activities or build them up. At the end of the process, Sun Life's actuaries settled on the latter:over a five-year period, between 3 percent and 5 percent of the group's longterm assets, or up to £500 million, were to be committed to best-in-class mid-market buyout funds in the UK and continental Europe.

?When we come to make the final decision, we don't have as much baggage. We bring greater objectivity to the investment process, and that's the bit that adds value.?

CAPACITY CONSTRAINTS
Sun Life wanted a well-diversified portfolio by industry sector, geography and deal originator, but it also insisted that money be given to top-performing managers only. However, as far as Whitney was concerned, there weren't many top-performers around with sufficient capacity to build the kind of diversified fund investment programme that Sun Life had asked for. Handing a large amount to a fund of funds was not an option either, because the actuaries were loathe to paying the additional management fees that such a move would have incurred. Compromising on manager quality was out of the question, too. As a result, reflects Whitney, Sun Life's private equity projectwas ?a bit stuck.?

At this point, Whitney harked back to an idea he first had while at Natwest: rather then putting together an expensive bundle of fund investments, why not invest in the asset class more cost-effectively by way of assembling a diversified portfolio of coinvestments in direct transactions in partnership with a small and hand-picked group of deal originators?

It was the building block for a business model that to this day remains one of the most unusual in private equity: a hybrid structure best described as a combination of value-added fund of funds and direct coinvestor with a unique deal capturing mechanism. Shortly after its establishment, in April 1998, Whitney spun out of Sun Life to grow the business independently under the Parallel VenturesManagers moniker, but the basic concept was given shape during the early days as a captive entity.

Fundamental to the Parallel model are contractual co-investment agreements with directly investing European mid-market groups. At present, six such agreements are in place, with 3i and Barclays Private Equity in the UK, Equivest in Germany, Acland Capital Investissement in France, PM& Partners in Italy and Minerva Capital in Spain.

Under the deals, each of which has a life cycle of ten years, the managers are obliged to present Parallel with a specific amount of fully processed and already internally approved investment opportunities. In theory, the Parallel team will deliberate each investment opportunity over a period of two to three days before reverting with detailed due diligence questions. In practice, says Whitney, many deal proposals are shown to Parallel at a more preliminary stage, with the originator seeking feedback.

In either case, once Parallel is comfortable with a specific investment proposal, it will contribute between 15 pecent and 30 percent of the equity required to fund the deal. Discretion over the co-investment decision, crucially, is entirely Parallel's. Says Whitney: ?We're here to do deals but not at any price. We're trying to find reasons to say yes, it's a positive ethos. We have missed some very good investments, but overall we've turned down more deals that turned out mistakes.?

In addition to making co-investments, which takes up most of the firm's time and resources, Parallel on an opportunistic basis also pursues what Whitney labels ?syndications? ? direct investments alongside other sponsors where unlike in a bread-and-butter co-investment situation, the firm undertakes full due diligence on the target company .

Parallel is looking to complete approximately 20 transactions a year, deploying capital that its investors are asked to commiton an annual basis. Target amounts to be invested vary from year to year ? suffice it to say that in recent years Parallel has managed to come within 5 percent of its annual deployment target.

?We're here to do deals, but not at any price. We're trying to find reasons to say yes, it's a positive ethos. We have missed some very good investments, but overall we've turned down more deals that turned out mistakes.?

Parallel Ventures Managers