LAVCA spoke with Rodney Lake, Senior Investment Officer at George Washington University about their strategy for private equity investments globally and his recent tour to key markets in Latin America.
Lake: The George Washington University’s Investment Office manages the university’s Unitized Endowment Pool, which represents the majority of GW’s Endowment assets, under the guidance and oversight from the Committee on Investments of the Board of Trustees.
As of June 30, 2010, the market value of the Unitized Endowment Pool was $733 million. GW’s total Endowment assets were $1.144 billion. The Unitized Endowment Pool is broadly diversified globally: Global Equity (public) 43%, Strategic Equity (private) 33%, Fixed Income 21%, and Cash 3%.
LAVCA: Roughly what percentage of the Endowment portfolio is allocated to private equity and to emerging markets private equity specifically? Will this change going forward?
Lake: GW’s allocation to private equity is approximately 33% by market value, as of June 30, 2010. The vast majority of this allocation is in the United States, with a small portion allocated to emerging markets. Going forward, the exposure to emerging market private equity is likely to rise, however, at a measured pace. We are mindful of the challenges presented by making private equity investments in these markets and we will take our time to grow our circle of competence as each of these markets can be quite different.
LAVCA: What geographies and/or industries are of particular interest to you right now? What about in Latin America specifically?
Lake: Geographically, our areas of interest have been and continue to be: United States, Asia excluding Japan, and Brazil. More recently, we are spending time to better understand: India, Colombia, Peru, and Chile. Sectors that we continue to focus on are energy and mining. Regardless of geography or sector, we are always looking to partner with capable and honest management teams that are running great businesses offered at bargain valuations.
LAVCA: What would be a typical size of a commitment that you make to a fund?
Lake: Properly sizing an investment allocation is essential. That’s no secret. However, one’s approach and temperament have a significant impact on the decision and the ultimate outcome. We focus more on how much we can lose rather than how much we might make. This view informs our allocation decisions and attempts to minimize our down-side. Overall, our private equity allocations to single funds range from $10 million to $25 million. More importantly, we are seeking long-term partnerships with investment managers with the goal of making investment allocations across several funds.
LAVCA: How do you go about finding and selecting the fund managers you work with?
Lake: We attempt to be opportunistic when sourcing investments and investment managers. This is easy to say, but difficult to do. It requires us to not become complacent with our research and to continue turning-over as many stones as possible. For research, we use the well-known publications, lesser-known trade journals, our own networks, and on-site due diligence. We find no substitute for conducting on-the-ground research and interacting with as many people connected to an investment opportunity as possible. Investing is more art than science, and to this point, GW’s Committee on Investments provides us with market insights and the nuanced view that comes with experience. This is particularly beneficial when evaluating investment opportunities.
When selecting an investment manager, partnership is a critical component of our investment framework. We are not interested in just being a capital provider. We are looking for investment managers who want to establish and build a partnership. The benefits of long-term partnerships are many, not the least of which is having the confidence to invest when the environment looks the worst. It is difficult to make an independent decision when one lacks confidence in their investment manager, especially when the investment idea is unpopular. For this and many other reasons, partnership matters.
LAVCA: You’ve traveled to Latin America recently. What countries did you visit? What is your take on the current state of the private equity opportunity in the markets you are looking at?
Lake: I recently spent several weeks in South America, looking at current investments and evaluating potential opportunities. Specifically, I spent time in Brazil, Colombia, Peru and Chile. As many investors know, the private equity markets in Latin America are growing and evolving. In fact, an argument can be made that the pace is accelerating. The most interesting markets for us now are Brazil and the Andean region. While we have not discovered any new frontiers, we do think that some of these markets provide an ample set of investment opportunities and challenges. This should keep us busy, if it does not, we’re probably doing something wrong.
LAVCA: What data do you use to benchmark returns in Latin America? Would the availability of better data make you more willing to allocate capital to the region?
Lake: We do not use Latin American benchmarks to evaluate in-region investments. All investment opportunities globally compete against one-another and cash for an allocation. The up-side and down-side scenarios are always considered, as well as how the investment opportunity fits into the overall portfolio. For Latin America as well as other emerging markets, the bar is high because we consider the potential down-side to be significant. As with all our investments, we require an appropriate margin of safety to guard against our research being wrong, bad luck, and, of course all the things we did uncover during research and due diligence process (the unknown unknowns).
LAVCA: In your opinion, what are the 2-3 biggest challenges the region faces in order to further spur the development of private equity investment?
Lake: For evidence that Latin American private equity market is evolving, investors will want to see a ready market for public listings with a longer track-record of success and clear demand from strategic buyers. Additionally, investors will want to see increasingly sophisticated legal institutions and investors’ rights being respected. A potential headwind in the near-term is the attention that these markets have received. In the short-term, the volume of capital flowing to these markets has the potential to reduce returns (capital is the enemy of returns). Additionally, inflation has been lurking around and tends to be no friend of the equity investor.
LAVCA: How do you see your allocation to private equity in general and to emerging markets private equity in particular changing over the next 5 years?
Lake: We continue to find opportunities in private equity and expect our overall allocation to remain about the same. Not unlike many other investors, we find the emerging markets a compelling investment opportunity and expect our private equity allocation will grow over time. That said, we are mindful that like any investment opportunity, emerging markets offer both good and bad deals. Even considering the growth prospects in these markets, it’s difficult to make money if one over-pays. A disciplined approach is required.
Our challenge will be to spend more time researching and evaluating these opportunities, growing our circle of competence, and finding local partners. This will provide us with the confidence to make intelligent investment allocations.