LP Panel: Deployment in Private Equity w/ Tomi Viia, OP Financial Group & Marko Hara, Decile Capital

Sarah Chen-Spellings (intro):

Hey hey, folks. This week I am planning my return to Europe for this summer. And so whether you are a GP, LP or even a founder, I thought we'd all benefit from this very conversation I had last summer with some European LP veterans of industry I respect.

Mark Hara, formerly the director of Elo, one of the largest employee pensions in Finland, and Tomi Viia, currently head of investments at OP Financial Group with some €14.2 billion assets under management.

This was a clip from the LP Summit my firm Beyond the Billion co-hosted in Helsinki in 2023 with Arctic15, led by my friend Jan Omri. I share quite a bit about the context of this conversation in my intro, so let's jump right in.

Sarah Chen-Spellings:

What a great start. Hi, gentlemen.

What a great start. A lot of discussion and I love how we're starting with the future is indeed by definition, different from the past. And today we will be talking about deployment. Now that we've had a little bit of the macro, we'll comment a little bit about that; but to really weigh in on what do we do now with current market conditions.

We just went through this Covid period, went through a technology asset bubble, where the prices were all time high through ’21, ’22. And now it's a huge market correction, where, as we're thinking about building up, especially in Europe and in the last decade, building up a private equity allocation.

With this correction, what does this mean moving forward? How do we think about really delivering the returns that as very clearly said by Lisa and Joe early on that, you know, it is time to really be focused and deliver returns as you promised and be disciplined. How do we bring that to the table?

So with me, of course, is a very experienced panel. Tomi, Chief Investment Officer at OP Financial Group Insurance Investments, and Marko Hara, currently an independent advisor, but almost for the last decade, has served as Director at Elo and led a team that managed a portfolio of something like 50 private equity and venture capital investments and 20 investments in unlisted companies.

So a lot to pull in from, but let's get started here. Maybe Marko, if you can sort of set the scene, commenting on what was said earlier. What do we think about you know the current market conditions and how should we be reacting to what next here?

Marko Hara:

And maybe a few words about myself. I guess I’m one of the older guys in the room, I started 1986 and that was one year before the black Monday. And I was an options and futures trader, which was not the best place to be.

During the 1990s, I was a co-founder and founder of four different companies during the great financial crisis in Finland and we survived that. 1999, I started as a family office investor and a GP, investing in technology companies. There was one, two years before the tech bubble and we survived even that, even though it took something like five years.

2007, I started as the head of private equity in a pension plan, which was one year before the great financial crisis. So my timing has always been perfect, so to speak. And we survived even that. And it took about four or five years to normalize the situation.

And then came the Euro crisis. And then we have the 2019 COVID, which was a short term crisis. And then we have the surge, which means that the Great bull markets continued and now we are here.

So that's the background for myself but when it comes to the question, I would say that experience matters. And what we are looking at here is something that had happened already in the past several times. It's not the same thing, but it's about the same things.

Sarah Chen-Spellings:

So let's dive a little bit deeper because we have the benefit of you being through the many different cycles. How would you advise LPs in the room to be thinking about this current cycle?

I was just reading Washington Wall Street Journal earlier and you know venture fund returns have had the worst slump in this decade.

Marko Hara:

Basically, you have to keep calm. There is not much you can do about it when it comes to your portfolio, unless you want to sell parts of it, which means that you have to give a great discount.

Which I would not recommend anybody to do if you don't have to. So basically you just have to ride over the cycle.

Sarah Chen-Spellings:

Tomi, maybe you can be helpful here in your view, and maybe share a little bit of your vantage point and your experience from insurance.

Tomi Viia:

Yeah, so great to meet you guys. My name is Tomi Viia. I work for the OP finance group. I've been chief investment officer for maybe a bit over 20 years now.

How we look at it is of course like a holistic view on a portfolio level. So looking at the old asset classes and of course it helps when you have the experience of different cycles.

And I think every cycle is different. But I would say this time, what we saw and have been seeing is of course, last year we saw the real rates rise, stock and bonds going down, but in like alternatives and illiquid side, not so much change.

So actually, when you look at the diversified portfolio, you haven't really seen the assets coming down. I agree that maybe venture capital, or big funds have seen some price depreciations, but in a whole portfolio level, you haven't seen it yet.

And as Joe mentioned that earlier, that there's a sale, I would disagree in that sense that maybe, and this is the big question, is this like, uh, 2009 or 2007?

And we haven't still seen the biggest rundown yet. And of course, this is, everybody's waiting for the recession, and it's coming there on the stairs. And everybody's watching it, but it hasn't yet come.

Sarah Chen-Spellings:

Yeah, so Tomi if I may, I mean, you're assuming a very well diversified portfolio allocation, and maybe this is a segue into that.

I guess from an institutional side, how are the allocations for the benefit of people in the room here? Is venture capital really just a blip in the radar so it doesn't matter? How is your thinking shifting now that public equity is being affected tremendously?

Tomi Viia:

Yeah, well, of course, when the house is burning, you have to concentrate on the biggest. European venture capital in a bigger sense is playing very small level or small share in your portfolio. I don't know if you agree that on that.

And then of course there isn't much what you can do. Of course you have to be patient but every institutions have their own investment plans for private equity or venture capital, and there we are going to commit this amount of capital and this amount of new managers.

What happened last year was really big change. And in that sense, there might come some restrictions. Like, you know, okay, let's have a pause here. And this is the dilemma for many institutions that, okay, there are now opportunities if we commit now, the capital will go there committed in like a three, two to three years.

And this is really the best time to go, or at least keep on investing. But then again, there’s might be a bigger problems if you haven't built your portfolio like for the long term.

Sarah Chen-Spellings:

So Marko, I mean, we were looking at some data together here. Can you share a little bit about, you know, how you're seeing the split between institutional allocations, from a profile of endowments, foundations, insurances, compared to family offices.

How is the weighting into private equity? And is this going to change now moving forward?

Marko Hara:

Well, I would say that's traditionally private equity on venture capital investments, the endowments are family offices, high net worth individuals; have always had higher allocation on venture capital direct and funds.

The last data I was looking at was in general high network or the ultra high network individuals and in family offices, they had about 20 to 25 percent allocation in private equity and venture capital direct and indirects. And they had about 45 in alternatives. That's what they had, which means that a great part of that private allocation was in venture capital and growth, about 60 percent, maybe, 65 percent.

When it comes to institutions like us, the last time I look at the figures in my the last company I was working for, we had about, private equity and venture capital funds for €6 billion. That was the net asset value for the portfolio, and the venture capital allocation in funds was just few percent.

That's how it was. And there are several reasons for that. Because for 5, 10, 15 years ago, if you wanted to invest In the US venture capital funds, you didn't have the access to these funds. It was difficult to get in because they had the homeboys there, the local investors who've been supporting these companies for the past 20 years, so there was no access.

So what we did at Elo, we invested in domestic venture capital funds as you did. You did the same thing. And I think we invested in about 25 different funds in Finland, including some of these funds which were micro funds. Which means that the assets under management for single funds were less than €20 million, which is a really small fund for us to invest.

When we followed our rules, not to have more than 10 percent in a single fund. It meant that we could invest only between €1 to €2 million in one micro fund in Finland. And the largest funding funds in Finland in venture cap were about 150 maybe. There were a couple of funds and that meant that we could invest up to €15 million, which we did.

On the other hand, it means that we had to invest in 25 funds to get a portfolio, which was maybe under €200 million out of €6 billion. Because we didn't invest in bigger funds abroad, we didn't have access to these funds in the past, and now we would, or my former company would have it.

So that's a dilemma for big institutional investors, because you don't want to have a portfolio where you have several hundreds of different funds. Last time I look at it for about six months ago, we had about NAV was €6 billion.

We had a commitment for a few billion And the amount of funds we had there was a little bit over 200. And it's a nightmare to manage a portfolio over 200 funds. It's a nightmare.

Sarah Chen-Spellings:

Yeah. And Marco, I mean, part of this is also pretty interesting. You talked about the challenges, right? That historically, a lot of LPs in Europe have not have that access to what were either name brand funds or top tier funds in the US and beyond, and so you focus domestically.

But now with market conditions, good news for those who have the capital in hand. But do you think this will shift now that there is more a demand, the fundraising winter is here in many ways, for those who are, what are they have nots?

Do you think this will be an opportunity for access to open and our European LPs going to be taking this opportunity?

Marko Hara:

I'm totally sure about that. We have already seen it

Sarah Chen-Spellings:

Yeah.

Marko Hara:

You have access to some of the top tier funds, which were totally impossible for us for 15 years ago 10 years ago, maybe 5 years ago.

Now there is an access not only for the institutional investors, but also for the, I would say, the high net worth or ultra-high net worth and also family offices.

Tomi Viia:

Yeah, I agree. I agree.

I remember, I think it was like 5, 6, 7 years ago, there was this initiative in at the OP Group to build up something new venture and what could reflect fintech future could be for banks.

And I participated in this round also in Silicon Valley, and meet the managers, we are managing €10 billion and total assets with the asset management is roughly a bit under a hundred billion. So, but in relative terms, we are a small investor for US. And I met a lot of VCs backed GPs in Silicon Valley.

And I felt that, okay, you can get in a line and maybe wait for like 5 to 10 years and maybe then get in, or it would have required a lot of work. And of course, the reach would have been very difficult to get at least any allocation. But I would say maybe this time it's different.

But then again, I would say that the markets should be viewed as a holistic view. So as Lisa said, you can get the 5 percent yield on dollars in treasuries. Or even, yeah, even the reverse repo in the central bank Fed can provide you that. And that sets the limit for everything.

And I would say, when you think about the new real rate environment. The markets haven't settled yet the new normal. So maybe in some asset classes we have seen that but it will take time to face the reality For the new rate environment.

Sarah Chen-Spellings:

So the new rate environment, the market correction is gonna take some time. But I guess with the LPs in the room, part of this discussion here is that, how do we think tactically moving forward? Is it a wait and see?

I mean, both of you have said, there's not much you can do. But what would you say to your younger LPs who are thinking about portfolio construction and how to actually make this work in a time that is uncertain?

Tomi Viia:

On an optimistic side, I believe we need growth and what we saw like the last 15 years. That there wasn't growth anywhere, it's just rates going down. And this is the place, I would say that this is one of the few places that we can, as an investor, see growth. And see actually the small companies grow from small to billion dollar companies.

So, in that sense, it's a very good place and very important place for institutions to be part of that and find the places because, yeah, to be invested and even grow their allocations in this asset class as well.

Marko Hara:

I do agree. If you have money and resources and if you don't have problem with liquidity, never, ever stop investing.

Don't try to time the markets. This probably is one of the better opportunities we have had in quite a few years.

I experienced that after the financial crisis where we did buy a lot of secondaries fund on fund level portfolios where they might have 30 different funds in a portfolio. There were sellers back then and then they turn out to be very good investments.

I also experienced that right after the enduring the tech bubble where when I was investing in single companies. If you do have a good companies in your portfolios, you should really try to support these people.

On the other hand, you have to make some choices. If you really see that some of these companies are not going to fly, you have to let the puppy go, so to speak. But if you have the companies there, which you can support, you definitely should do it.

So it's a good idea to basically not stop investing when things look bad.

You make the worst mistakes as an investor when the things look too good.

Sarah Chen-Spellings:

Right. So Marko, as I hear from some of my LPs, it's never as bad as it seems, but it's also never as good as it seems. And you have to cut the losses, let the puppy go, as you say.

But if we can be tangible here, is there an example? Who do you think in this market environment, and both of you have been through multiple cycles, who will prove to be the winners?

What are the characteristics that you're looking for in your investment opportunity in this time?

Marko Hara:

I were to look at the new investments or the old ones on fund level, as our colleagues mentioned before, you have to try to find teams where they have team members or advisors who do have cross cycle experience. Which means that there should be people advisors, maybe the managers who have seen the GFC, and maybe even the tech bubble.

I know that the some of the larger international LPs, when they look at these funds, they really prefer these kind of companies which do have that kind of experience, because it's a totally different ballgame to make investments in honeymoon land.

It is totally different because once you start to manage these single companies, when things go unexpected, the team dynamics is totally different.

You are not as optimistic as you used to be. You start to argue about things, about money, growth and strategy. Then the experience, because experience is a hard teacher. She gives you the lesson first.

Sarah Chen-Spellings: Tomi?

Tomi Viia:

Yeah. Well, good market that you're speaking for that we will still have at work in the coming decades also.

But I would say, I like what Joe said earlier about this expecting capital growth or getting returns. And I mean, like in a longer terms, investing is all about dividends, rents and coupons. And that's what we live on. And if you wait for too long and the manager doesn't return any capital, and then the as you said, the honeymoon land is over. The manager missed the opportunity and maybe has to raise a new fund.

So it's really difficult situation. And in that sense, it helps to see that, okay, not to wait for the last euro or dollar in on the table, but also taking that like a long term view and also getting returns to the investors.

Marko Hara:

Yes, the DPIs, they are important in a sense.

You might find that you have been an investor in one GP and you're investing in their fourth fund. So they might have four different vintages than the oldest one is over 7 maybe 8 years. And you could find that the DPI is extremely low.

And it really means that if they have not returned any money, it's quite likely that the final results are going to develop relatively disappointing, I’d say so.

Sarah Chen-Spellings:

Yeah. We're talking about good vintages here that we'll be looking out for.

And actually I was tuning into Mubadala earlier. And one of the things that was commented on was the fact that we're actually, while this market correction is happening with rising interest rates, we're also experiencing a huge platform shift into AI.

So I won't be the first panel that mentions ChatGPT, you've heard it many times again. But how are both of you thinking about, you know, this huge platform shift and the reality that hey, even as the market pulls back, this vintage, these next few years with the explosion of AI could be transformational.

Marko Hara:

Absolutely. And if you happen to own Nvidia shares, you know what I'm talking about.

Tomi Viia:

Yeah, absolutely. I mean, what it will shift is that of course, the capital is needed less to even smaller companies to grow their business. In that sense, it's all even more difficult for capital to find that right companies.

So I think there will be a lot of disappointments as well. And in that sense that, I would say obvious is that the smaller funds can make huge returns and also It requires a lot of work for the managers to find the best companies.

Sarah Chen-Spellings:

Well, so interesting So despite both of you seeing experience being one of the key drivers, of course get advisors, but small funds and merging managers are not off the table for both.

Marko Hara:

Absolutely not because we have already - we have invested in those type of situations. And we've seen that some of these rising stars or emerging managers or hidden gems. They turn out to be real good ones, not all, but some of them.

You try to focus on the team because you don't know anything more about these people than who they are and what type of people they are because there is absolutely no track record.

They might have a background as entrepreneurs or something like that, which doesn't mean that they are going to be good investors, investing other people's money. But you have also supported these kind of companies in Finland and some of these GPs are one of the best you can find international which with huge returns, not all but some.

Tomi Viia:

Yeah. Just continue that, that of course, how can I as an investor benefit for that? Now there are movement, but also I guess then you can, or what is the like a longer term impact?

Will it create growth for benefit of the firm, GDP growth, or at least are we are all unemployed in like in a 20 years, but I would say it's a, I would be more optimistic on that.

So it will at least in a short term productivity growth, boost, and also growth.

Sarah Chen-Spellings:

Excellent. We have a question in the audience and this is the time.

All right. I'll just repeat that for the audience. Where are the best soft skills and hard skills that you are looking for in GPs in this environment?

Marko Hara:

I would say when it comes to soft skills, they are the same regardless of the markets. You have to treat these people fairly when it goes up or if it goes down.

Don't alter your behavior towards the founders and the people around you regard, if it's going up or down, you have to try to be the same. Treat them as people.

The hard skills probably would be that it's very beneficial if you have seen what happens in reality. As a company level when things go south, what are the real consequences what happens there?

Because they have to start concentrating different things. It's same with the more mature companies as well ,when you have to do restructuring.

Sarah Chen-Spellings:

Tomi.

Tomi Viia:

I agree. I agree. That's how the manager reacts to the new situation and I said joe said that taking the not concentrating on their own work, but also taking the input.

Sarah Chen-Spellings:

Being coachable.

Tomi Viia:

Yeah, being coachable. I would say, my work, I feel that the institutions are not perfect. I mean, there are human decision makers there as well. And when things go south, also these institutions have to think about their processes.

And if I bring two managers that it's an established one and safe bet, and then we have an emerging markets would be like better. But it's a big job to convince that, hey, maybe this is the now, to this would be better, but because everything looks uncertain, we go with that established one with a great track record,

But we never know if that's the good work for the next 10 years.

Sarah Chen-Spellings:

All right. Well, fire round, key takeaway for the audience. And we have some GPs that sneaked in.

So maybe for the LPs and GPs in the room, what's your key takeaway from this?

Marko Hara:

Keep on investing.

Tomi Viia:

Be patient.

Sarah Chen-Spellings:

Be patient. All right. Be patient, but be certain that you need to let the puppies go when they are not doing well.

Never time the market and look out for those hard and soft skills to develop and adapt in this difficult environment.

Thank you very much, ladies and gentlemen, private equity allocations.