LAVCA caught up with institutional investor Worth Groome, Investment Manager for Allianz Capital Partners, for insight into their potential commitments to Latin America and how the region compares to other emerging markets.
LAVCA: Please give some background on Allianz Capital Partners. What percentage of your portfolio do you allocate to Private Equity? What about emerging markets and Latin America specifically?
Groome: Allianz Capital Partners (ACP) is the captive alternative investments platform of the Allianz Group with offices in London, Munich, New York and Singapore. We focus on private equity fund investments, direct infrastructure and renewable energy investments and have a total of €9.5 billion in assets, including about €6.5 billion invested in a core portfolio of 70 private equity managers globally. Our portfolio is important to our single client, Allianz, but still is a small percentage of Allianz’s over €400 billion balance sheet. In private equity, we target buyout and growth equity funds in the Americas, Asia and in Europe as well as venture in Asia, and are also active in co-investment and secondary investments. Our plan is to commit around €1 billion annually in private equity, though this will vary year-to-year based on fundraising timings and perceived opportunities. Our emerging markets exposure today is small at less than 15% of our portfolio, most of which is in Asia.
LAVCA: How long have you been investing in Latin America? What initially attracted you to the region?
Groome: We have been covering the private equity market in Latin America from New York for over 10 years and began to dedicate resources to it about 4 years ago when we viewed it as more proven. We initially were attracted to the region’s macroeconomic fundamentals, relatively stable political systems and rule of law, more limited correlation with other regions and attractive historical returns.
LAVCA: In your experience, how does Latin America compare to other emerging markets?
Groome: Latin America is quite unique. We have found a number of managers with long histories and good track records. While strategies vary, most managers are more active, control-oriented investors similar to those we see in North America and in Europe but do not rely upon leverage for returns. Currency volatility is more of a consideration in Latin America, but we take a long term view so are not too concerned about it. Of course, the private equity market in Latin America is smaller than in Asia, our other main emerging market, though it is still sizeable.
LAVCA: Which LatAm countries are of most interest and why?
Groome: We are certainly interested in Brazil as the largest market in the region. While Brazil has attracted the most capital, the middle and smaller ends of the market are robust with opportunity and Brazil is not over-saturated with funds. We like managers’ ability to help companies professionalize, improve operations and accelerate growth. Despite the economic slowdown in Brazil, we have seen countless companies continue to grow rapidly. Also, the government and regulators are supportive of foreign investment in private equity. Beyond Brazil, we are particularly interested in Mexico, Colombia and Peru. Mexico is a large economy and private equity is quite underpenetrated. While it is tied to the U.S. and getting deals done has historically been harder than in other countries, we are tracking several attractive groups. Colombia and Peru have had strong economic growth and are becoming more proven destinations for private equity investments. We have been impressed with a number of groups in both countries but are mindful of the large amount of capital raised targeting these countries in recent years.
LAVCA: Tell us about your current commitments in Latin America.
Groome: We have yet to commit to a manager in Latin America despite our coverage of the market. We have gotten close to a number of commitments, but ended up not investing largely due to some concerns over fund sizes. Today, we have a fairly robust group of targeted managers with whom we are in close contact and we are very hopeful of making an investment. Several of these groups should be in the market in the next year. The groups on our watch list are a combination of country-specific and regional managers and there are certainly advantages to both types of funds. In regional funds, we are more skeptical of managers without local presences, and in country funds, we seek to ensure that groups are willing to step back from the market if it becomes over-heated. More near-term, we are focused on a few Brazil funds and regional funds. A few of our global managers are investing in Latin America, but these have generally been in only the largest transactions and are a small percentage of their funds. We target commitments of US$40 million to US$140 million, though occasionally will consider lesser amounts to smaller funds and in new relationships.
LAVCA: How often does Allianz co-invest? What are the requirements for co-investing? Have you looked at or closed any co-investments in LatAm?
Groome: We are quite interested in co-investing, but it is not a prerequisite for a commitment. We have the processes and infrastructure in place to co-invest and have closed a number of investments in Europe, North America and Asia in recent years. Co-investing is an integral part of our strategy and it allows us to put more money to work with whom we view as the best managers. It also provides better economics and allows us to get to know our partners from a different angle. We generally will only co-invest with managers in our portfolio, so this has been a constraint in Latin America.
LAVCA: What are the 2-3 biggest challenges for international LPs looking to invest in the region?
Groome: A challenge for LPs is resources. We believe that in order to invest prudently in a region, you need to get to know all of the investable groups and continuously cover the market, so it is not good enough to attend a conference or visit the region every year or two. Access to the best managers in Latin America can also be a challenge. Like in other regions, there are a number of groups which become over-subscribed very quickly so LPs cannot wait until they receive PPMs.
LAVCA: Can you describe your due diligence and selection process? What experience level are you looking for in a manager? Why? Would you consider investing in a first time GP (globally and/or in LatAm)?
Groome: Our due diligence process starts with our continuous market mapping. It would be unusual for us to commit to a manager whom we first meet during a fundraising process. Once the deal team has identified an attractive opportunity, we will discuss it with our global investment committee and then begin to spend a lot of time on it. Our diligence process will involve meeting with most members of investment teams, visiting all offices, reviewing investment memorandum and other documents, doing significant desktop work and conducting reference calls. We will consider first time funds, but generally only groups with people who have strong attributed track records and long period of time working together (spin-outs are most typical). We would be more likely to consider a first time fund in Latin America (or in any region) once we have a more mature portfolio. Emerging managers can be more risky, so we need to be especially convinced of high return potential.
LAVCA: What are the most important factors you consider/characteristics you look for when selecting fund managers and what advice would you give to managers looking to work with Allianz?
Groome: We seek managers with competitive advantages, top-caliber professionals, strong track records and a repeatable strategy and process. As we do have a mature portfolio, portfolio fit is also an important consideration. Private equity is a very long term business and we appreciate groups that meet with us regularly for updates, both in New York and when we are in the region.