Copernicus to set up fund of funds
Latest in a series of new financial instruments available domestically would target pension funds as potential customers
By Aleksander Nowacki
Copernicus Finance is to set up the first fund of funds (FoF) in this country, a private equity institution that would place investors' assets in other private equity funds. The FoF is targeted at pension funds, which are currently barred by existing legislation from investing in private equity. Copernicus has declared it will withdraw from all the funds it currently manages if its experiment proves successful.
Paweł Gieryński, CEO of Copernicus Finance, says that several pension funds have shown interest during preliminary talks. But many pension fund managers are not enthusiastic about the idea. Adam Chechłowski, Credit Suisse Life & Pensions' management board member responsible for investment strategy, questions the very sense of such an enterprise. "I am not convinced that building a portfolio of shares in venture capital funds makes sense at all," Chechłowski said. He declared that he was aware of the Copernicus project but felt that many crucial questions still needed to be answered. One such question is liquidity of shares in the fund.
"We would not feel comfortable without a clear exit path," said Marek Mikuć, board member responsible for asset management at Allianz pension fund. "Even if the law (forbidding us to invest in venture capital funds) is changed, I can't see our fund exposing itself to that category of assets to any great extent."
Copernicus plans to address the liquidity issue by having the certificates trade publicly. In such a case, Mikuć said, an investment in Copernicus' FoF could be considered.
Despite the marked lack of enthusiasm among pension fund managers, Gieryński said that the project was a response to an existing demand at those institutions. "We believe that there is an existing demand and we are creating a solution to the question of how that demand could be met within the existing legal framework," he said.
That framework could, however, change as soon as this year. Parliament is currently working on a new Investment Funds Act that would ease some of the restrictions on pension funds' investments.
Copernicus does not expect its prospective clients to allocate a large proportion of their portfolios to pension funds, saying that it would be realistic to expect some 0.5 percent of clients' assets to be placed in funds initially, although the share could rise to 2 percent within two to three years.
Despite the relatively high fees that FoFs typically draw, Gieryński is convinced that its advantages to pension funds would be significant, saying that it would be cheaper than setting up a separate research unit to investigate the market, necessary if a fund wanted to invest in individual private equity institutions. Copernicus' FoF would also be an active investor seeking supervisory board representation at the funds in which it invests, something pension funds are usually reluctant to do.
Copernicus is planning to begin formal fundraising this September and to make initial investments next year.
The fund aims to have a capitalization of around zł. 600 million (€138 million), while a single investment would range between zł. 20 million (E4.6 million) and zł. 60 million (€13.8 million). The FoF would target primarily mid-sized institutions with assets under management to the tune of €30 million-€100 million (zł. 131 million-zł. 435 million). Its time horizon would be eight years, although the option to trade certificates on the public market means that investors would not be locked in for the whole period.
Gieryński said that the FoF would invest in institutions all over the region, but most assets would be allocated to Poland as it is the largest and most promising private equity market.
The fund would mostly invest in buyout funds, although it does not rule out the possibility of venture capital investments. It would not expose itself to first-time funds to any significant degree, opting instead for established institutions.
Should the project prove successful, Copernicus has declared it would terminate all its other funds in order to avoid any suspicion of conflicts of interest. Copernicus Capital Partners manages two funds with $36.2 million (zł. 141.3 million) in assets under management. All these investments are due to terminate within the next two years. Copernicus Finance also manages two listed national investment funds (NFIs), Piast and Octava, as well as NFI Fund Holdings.
Private equity funds in the central and eastern European region currently have €4.8 billion (zł. 20.9 billion) in assets under management, according to the European Private Equity and Venture Capital Association. The same source puts the number of funds in Poland at 40, with 29 in Hungary and 21 in the Czech Republic.
