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Mr. Lindauer, private equity is a term that seems to be on everyone’s lips at the moment. Allianz has been investing in this asset class for quite some time now. How are you positioned?

Michael Lindauer: We started investing in private equity funds for the Allianz companies as early as 1996, and we are one of the largest investors worldwide. In 2019, for example, we invested more than 3 billion euros in this segment as a combination of fund subscriptions and direct investments. Over the last 25 years, we have built up a portfolio of over 400 primary and secondary funds, as well as co-investments. ACP, which also invests in infrastructure and renewable energies in addition to private equity, has a total workforce of 130 employees. 21 of them work in the investment team, with an additional 10 colleagues working in the asset management team for private equity, spread across offices in Munich, New York and Singapore.

How many fund managers do you work with?

Michael Lindauer: More than 200, because business relationships are always slow to come to an end due to the long fund terms. We maintain active relationships with around 100 fund managers. “Active” means that we are invested in their latest fund, and plan to subscribe to the next fund as well. But this always involves a new investment decision. 

How is the private equity programme performing?

Michael Lindauer: We don’t publish any return figures for individual asset classes. What is important to us is that the return is appealing in absolute terms, and that we are achieving an excess return relative to equities. The increase in volumes shows that we are on a good growth path. Today, we have more than 17 billion euros invested in private equity for Allianz, compared with 8 billion euros in 2015. This is due partly to the fact that the entire asset class has grown considerably over this period, and partly to the fact that the life insurance business is growing and moving away from guarantees, creating more opportunities to invest in alternatives. Something that’s really important to us is the focus on long-term value creation for our customers. That is why we take a step-by-step approach to building up the portfolio. We definitely don’t want to invest a large sum of money in one go, and then realise that it was the wrong time to do so.

What sort of impact does a crisis as drastic as the Covid-19 pandemic have on private equity investments?

Michael Lindauer: In the short term, Covid-19 initially slowed down deal activity considerably due to travel and other restrictions, which had a knock-on effect on portfolio valuations. Our portfolio, however, includes considerable investments in sectors such as e-commerce, technology and healthcare – these sectors have proven to be fairly resilient to date. We have been witnessing an uptick in the markets again since May. In the longer term, a difficult phase like this one will also create opportunities again, especially for private equity. Crisis years have historically proven to be very good years to make initial private equity investments, provided that the right investments are selected. We are well prepared for this with our broad-based team, our broad sector coverage – and thanks to the financial resources we have at our disposal to make new investments.

Is it precisely in phases like this that ACP’s many years of experience pay off?

Michael Lindauer: We have survived various crises, and can draw on the lessons learned in the past. This – combined with the strong support of Allianz to back us up – helps us to keep a cool head even in extreme phases, and to concentrate on anticipating new trends and seeking out appropriate investment opportunities. A good network is also helpful. We have been working with some of our private equity partners for almost 20 years now. They know that they can rely on us even when times are tough, and the same applies vice versa.

Will the impact of Covid-19 change the importance of private equity in the longer term?

Michael Lindauer: The current situation will certainly reinforce a number of existing developments. The long-term trend shows that private equity is becoming a greater force in the market. To take an example, the number of companies financed by private equity is almost as high, and in some cases even higher, than the number of listed companies. Our private equity partners have proven to be responsible company owners during the crisis so far, and have remained active in the market despite a general slowdown in M&A activity. Assuming that this trend continues, the strong governance model that private equity offers will become even more attractive to investors and company owners, giving the industry a further boost. This will increase the range of interesting companies that can be taken into account for the purposes of future investments. As a result, we expect to see attractive risk-adjusted returns in this asset class in the longer term, too.

How good are the diversification opportunities within private equity in general?

Michael Lindauer: Private equity offers a whole host of opportunities to diversify the portfolio by selecting managers, industries, regions and investment years. We invest with numerous partners that we feel are particularly convincing, and that we have built good relationships with. When we subscribe to a fund, the calls are made over a period of five years. This allows us to achieve a good level of diversification over time, something that is also helping us in the current situation. As I said, the years in the aftermath of a crisis are often the best ones.

If you compare private equity to conventional equity investments…

Michael Lindauer: …private equity offers a number of advantages, especially with regard to governance. Private companies have monthly board meetings as opposed to just one annual general meeting, meaning that they are more closely managed by their investors. What is more, there is no pressure to report record profits quarter after quarter. Rather, the company can be developed in a way that will allow it to create value in the long run.

How does Allianz achieve regional diversification?

Michael Lindauer: Our strategy is to invest with equal weightings assigned to the three core regions of America, Asia and Europe. We are slightly overweight in Asia, because we believe that the growth momentum there is particularly interesting in the long term, meaning that attractive investment opportunities should open up time and again, provided we make the right choices.

Mega-buyouts allow larger amounts to be invested in a short space of time – but are these investments also profitable?

Michael Lindauer: Mega-buyouts are like big tankers: it’s not easy to steer them around a bend, but not every storm knocks them off keel. Small buyouts, on the other hand, can be compared to sailing boats: fast and easy to manoeuvre, but if the wind is too strong, the sails will tear. There is room for both in our portfolio, because we are convinced that both forms of buyouts complement each other well. A financing market that is running smoothly tends to favour larger transactions. If growth is on the cards, this is more likely to be beneficial to smaller transactions. Our philosophy is generally to adopt a step-by-step approach, and take care to ensure that our portfolio is balanced.

How “small” can a company like Allianz invest?

Michael Lindauer: We invest anything from 40 million euros in smaller funds to around 200 million euros in larger ones. We have a clearly defined limit: we don't want to have more than 50 per cent in any one fund. Shares of up to 20 per cent are more normal for us. Our strategy is based on broader access to investment opportunities, and on selecting the right fund managers to invest for us. We like to invest using what are known as spin-outs, where managers that we know set up their own funds. Ideally, we will have known these people for a few years already. We also obtain references, and consult our international network to get an overall picture. In addition, we work with a shadow portfolio in which we make a note of the managers we’d like to have. It’s a time-consuming process overall, which is why our big team is so important. In order to anticipate trends, you have to know the right people early on, even before new ideas emerge. This explains why we are on the road a lot (at least in normal times), meeting up with a large number of fund managers who may be of interest to us later on down the line. It’s more a craft than an art form.

How concerning is the volume of unallocated resources in the market, the “dry powder”?

Michael Lindauer: Dry powder volume can be put into perspective if we consider it in relation to equities: it only accounts for around two percent of the corresponding market capitalisation. Recently, however, market entry prices have been very high. As there is still a lot of money available in the market, there is a risk that A prices will be paid for B or even C assets. So it is important to continue to adopt a cautious approach and to be selective, despite a certain euphoria over private equity. If we embrace this approach, then we believe that there is still potential for attractive returns in the market. This explains why we remain convinced of the long-term appeal of this asset class, even in these current difficult times.

Does private equity have a special relationship with sustainability?

Michael Lindauer: While sustainability is naturally the hot topic on everyone’s lips at the moment, it has always been an important aspect for us. We make our capital available to fund managers for 10 years and more – if, two years down the line, it transpires that someone is acting unethically, then there is little you can do about it. That’s why we have always asked ourselves whether or not, and indeed how, a particular partner meets the relevant requirements even before entering into a business relationship. We drew up our first ESG requirements for the general partners around 10 years ago, and have gone on to refine them. When it comes to selecting managers, we also make sure that ESG responsibilities are placed as high up in the organisational chart as possible.

What do you consider to be the biggest private equity myth?

Michael Lindauer: The biggest myth is that everyone considers themselves to rank among the top quartile. We prefer to focus on our own return targets, which we aim to achieve over the course of a cycle. This involves looking at the absolute return. After all, we have witnessed vintage years in which the top quartile also reported negative performance. Other criteria that we take into account include the excess return over the stock market, and how we are performing within the private equity market.

What advice do you have for investors who want to invest in private equity?

Michael Lindauer: The most important point is to invest consistently, but on the basis of a robust selection process. In the beginning, this is something that can be easier to achieve with the help of experienced partners. You have to be able to hold on to the asset class, and have a very long-term horizon. This is a strategy that has worked well for us over the last 25 years.

Note: The interview is based in part on the article “Investing in 2,500 companies step by step” (Schritt für Schritt an 2.500 Unternehmen beteiligt) by Patrick Eisele, published in Portfolio Institutionell in December 2019.

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