Asset owners are taking a closer look at emerging markets. A panel at the Global Private Equity Conference held by the International Finance Corporation and the Emerging Markets Private Equity Association in Washington DC last week, focused on how large public pension funds are investing in emerging markets. The key takeaway? Smaller, specialized investments in managers and opportunities is a pathway to outperformance.
“The goal for us is to be really excellent LPs and partner with specialist managers who understand what is happening on the ground,” said Stephen Moseley, Head of Alternative Investments at Alaska Permanent Fund Corporation. Moseley has been leading an effort to diversify Alaska Permanent’s exposure to emerging markets private equity, an effort which he said is part of a pivot away from GPs in North America. “We understand the need for diversification,” he said. “Our approach in emerging markets has been roughly similar to our approach in North America. We’re looking for specialists with long track records.”
Moseley adds that specialists can help identify strong investable themes and avoid some of the risks that come from broad pan-regional funds that may not be as focused on understanding all of the players within a particular theme or sector of the global economy.
Moseley’s views were echoed by Brad Thawley, Senior Director at UTIMCO. UTIMCO has a long legacy of investing with boutique specialist firms and new managers in emerging markets. “We’re not afraid to go into fund one or fund two,” he says. “And as we start to cycle-test those managers and see how they perform over those early funds, we might re-up for fund three if they’ve demonstrated outperformance and the management team remains stable. Overall, it’s worked out well for us.”
Both men noted that smaller managers often outperform mega-funds in part because it’s more challenging to put big tickets to work in emerging market economies that haven’t achieved the scale of developed economies.
Roberta Brzezinski, Managing Principal of Strategic Partnerships at Caisse de dépôt et placement du Québec (CDPQ), who was also on the panel, noted that for investors that do need to make fewer, larger allocations there are opportunities throughout emerging markets but LPs have to have to keep an open mind about what the investment opportunities look like. “One thing that has been very helpful to us is to take an asset class agnostic approach,” she said. “We put a billion dollars to work in Colombia last year, but that included an infrastructure investment, a balance sheet loan and taking a minority stake in Colombia’s largest asset manager.”
For Brzezinski, Colombia is an attractive middle market emerging economy that is investor friendly and offered a lot of ways to deploy capital. As a result, CDPQ was able to make a significant allocation to the same place even if the money ended up being split three ways. “We’re looking at economies that have strong fiscal discipline and investor rights, as well as promising growth metrics. Once we’ve identified places that have all of those things, we start thinking through how to deploy the capital in the best way, we aren’t looking for specific fund structures,” she said.Related Stories: