LAVCA | The Association for Private Capital Investment in Latin America
  • About
    • About LAVCA
    • Board, Team, & Advisors
    • Media
    • Contact
  • Members
    • Membership Benefits
    • Current Members
    • Member Access
  • Education & Programs
    • About
    • LAVCA Week
    • Calendar & Past Programs
    • LAVCA Education
  • Research & Directories
    • LAVCA Research
    • Industry data
    • LP Survey
    • Directories
  • ESG & Impact
    • Deal Book
    • LAVCA ESG Deal Awards
    • Impact Report
    • ESG Guidelines
  • Articles
    • Featured Articles
    • Industry News
  • VC
  • Member Login
  • Member Access

LAVCA | The Association for Private Capital Investment in Latin America

A non-profit member organization

  • About
    • About LAVCA
    • Board, Team, & Advisors
    • Media
    • Contact
  • Members
    • Membership Benefits
    • Current Members
    • Member Access
  • Education & Programs
    • About
    • LAVCA Week
    • Calendar & Past Programs
    • LAVCA Education
  • Research & Directories
    • LAVCA Research
    • Industry data
    • LP Survey
    • Directories
  • ESG & Impact
    • Deal Book
    • LAVCA ESG Deal Awards
    • Impact Report
    • ESG Guidelines
  • Articles
    • Featured Articles
    • Industry News
  • VC

Featured Article: Pension Funds & Private Equity – An Approach to Funds, Co-investing, and Directs

May 21, 2015

LAVCA recently sat down with David Druley, leader of Cambridge Associates’ global pension practice, Aaron McKay, a private investments specialist and leader of Cambridge’s Latin America initiative, and Andrea Auerbach, global head of private equity research and co-investments, to talk about an approach to funds, co-investing, and directs.

Cambridge Associates Pension Funds Direct Investing

LAVCA: What are the recent trends you are seeing with large pension LPs?

David: Globally, pension plans that continue to accrue benefits, or are significantly underfunded, are seeking ways to increase their return on investment. As a result, many large pension plans have increased their allocations to private equity, venture capital and private real assets. This trend has been accentuated by the broad view that global equities are overvalued, thus there is a need to move funds to investments with a greater expected return. Low sovereign bond yields and tight credit spreads over the past 5 years, have also led pension plans to invest more in private credit strategies that generate a higher cash-on-cash yield, and have higher expected returns. The supply of these private credit investments has increased, as banks have pulled back from lending due to tighter regulatory constraints. Finally, given the low fee structure, there have been significantly more direct investments and co-investments in recent years as pensions look for ways to put investment dollars to work in private investment strategies in a more cost effective manner.

LAVCA: U.S. and Canadian pension funds have been investing in private equity for decades. How has their strategy evolved over time? From your point of view, what elements or conditions need to be in place for pension funds to effectively co-invest and/or directly invest in PE?

Aaron: From what we have seen, there is no simple formula as to the amount of time and the number of investment staff needed before a firm begins investing in directs and co-investments. What is clear is that making direct investments or co-investments requires more people, more experience, and staff with additional skill sets. Pensions generally graduate into making directs/co-investments when they have staff that have completed at least one full cycle of private investment experience (and have ideally invested through multiple economic cycles) and the assets they need to invest are so large it becomes difficult to meet exposure targets simply through fund commitments. But I’d like to reiterate that, there is no set model here. For example there was a recent article in Private Equity International about a very large North American pension fund who actually began investing more in directs than in funds, with success in the U.S. and Europe. However, for Asian markets, which are less familiar and more complex, they are anticipating that the majority of their private investment will be via funds. Client-specific goals, capabilities, and of course, the market, drive strategy more often than not.

LAVCA: How should Latin American Pensions think about direct and co-investment strategies?

Aaron: As I said before, it is helpful to have an investment team that has experienced (in their current or previous jobs) a cycle or two as an investor in private investments funds, and in some Latin American countries, like Colombia, the current regulatory environment has not been in place much longer than the life cycle of a single private equity fund! Having gained this experience, many investors who are new to direct and co-investing start with co-investing as a first step as it allows them to work with a General Partner they already have a relationship with. In general, this allows the investor to leverage the GP and learn alongside them. In direct investing the investor has to do all the work and many investors don’t yet have either the staff, skills, or direct investment expertise.

In addition to potentially superior net-to-LP returns, participating in a GP’s co-investment program has the potential to provide an investor with qualitative benefits such as the opportunity to gain expertise, enhance its reputation as a savvy, strategic partner, and strengthen its relationship with the sponsor, which may result in greater access to that GP’s funds. Co-investments can also be a way for investors to initiate a relationship with a new GP. In either case, investing alongside a sponsor is an opportunity for more rigorous due diligence and insight into the GP’s processes and investment behavior, which will inform the investor’s decision on whether to invest in the GP’s future funds.

Overall, the notion of “being a good LP”, that is, working well with GPs, is an important item for newer investors in private investments to keep in mind, regardless of whether a fund or co-investment strategy is being pursued.

LAVCA: Can you tell us more about why a co-investment strategy could be appealing to a Latin American Pension?

Andrea: As pension plans seek additional return, co-investments present themselves as intriguing opportunities for a number of reasons. Due to a lower fee structure, co-investing theoretically offers investors cost advantages when compared to more traditional limited partnerships. In addition, co-investments have shown the potential to achieve returns that outpace private investment funds. Co-investments can also mitigate an overall private investments portfolio’s J-Curve (the J-shaped dip in performance in the early years when fees and drawdowns exceed distributions from the investment). Cambridge has recently published a research report that focuses specifically on framing the opportunities and common pitfalls of co-investing. This report leverages our aggregated data on co-investments and funds generating co-investment opportunities. Our analysis suggests that individual co-investment outperformance is not just hypothetical, it is, in fact, possible.

LAVCA: You mention the “common pitfalls of co-investing.” What advice would you offer Latin American Pension funds who are interested in pursuing a co-investment strategy?

Andrea: Implementation is trickier than it may seem at first glance. It should be noted that there is an observable pro-cyclical risk to co-investment as the volumes of co-investment opportunities tends to increase with valuations. Success in co-investments across every asset class relies on retaining expert resources, either internal staff or external advisors/ investment managers. A successful co-investor will also establish internal processes to facilitate timely investment decisions, as well as effective investment monitoring and performance measurement. Co-investment is labor intensive and requires significant expertise as well as a clear understanding of what types of co-investments are likely to succeed. It is wise for investors to co-invest with GPs on which they have done due diligence and in which they have conviction—as they will likely need to rely heavily on the GP’s due diligence. Our advice is also for investors to focus on investments within each GP’s stated strategy, or “strike zone,” to avoid adverse selection. Whether it is investment in limited partnerships or co-investment, the most successful allocations are diversified across geography and vintage year. Finally, to enhance the probability of success, investors that choose to pursue a direct co-investment program should think carefully about program goals and set realistic expectations.

Featured Article: Pension Funds & Private Equity – An Approach to Funds, Co-investing, and Directs was last modified: April 11th, 2017 by Editor
0
Facebook Twitter Google +

Sign up for LAVCA’s bi-weekly Latin American Private Capital Update and the LatAm Venture Bulletin, produced specifically for venture investors, entrepreneurs, and technology startups in the early stage ecosystem.






Which LAVCA Newsletter would you like to receive?

VC Partner Events

    Tweets

    • Check out this week's top #startup deals and news on emerging tech in #LatAm from LAVCA's #LatAmVentureBulletin:… https://t.co/NOvUvkCflB

      27-Jan-2023

      Reply Retweet Favorite
    • #VC investment in #LatAm in 2022 reached USD7.5b, according to preliminary LAVCA data. Stay tuned for LAVCA’s yea… https://t.co/kAqAuL8Iq5

      23-Jan-2023

      Reply Retweet Favorite
    • January 20 is the last chance to register for "ESG in Venture and Tech Investing," the latest training in the LAVCA… https://t.co/UrbfcPgM7l

      19-Jan-2023

      Reply Retweet Favorite
    • Submissions for the 2023 LAVCA ESG Deal Awards are closing on January 20, 2023. LAVCA's ninth annual showcase will… https://t.co/AIu4FVKxT6

      11-Jan-2023

      Reply Retweet Favorite
    • Thank you for your continued support and commitment to grow private capital investment in Latin America. We look fo… https://t.co/AHA1txwyJZ

      30-Dec-2022

      Reply Retweet Favorite

    Submit VC News

    Have private equity or venture capital related news that you would like to share? Submit your press releases and news to [email protected].

    VC Industry News

    • Magma Partners Leads USD8.5m Round for Mexico’s Zenfi

      January 23, 2023
    • DILA Capital announces the final closing of its new fund, DILA IV, for USD115m

      January 17, 2023
    • Amplifica Capital Reaches USD11m Final Close for Venture Fund

      January 17, 2023
    • Framework Ventures Leads USD15m Round for Brazil’s Parfin

      January 17, 2023
    • DILA Capital Reaches USD115m Final Close for DILA IV Fund

      January 17, 2023
    • General Catalyst Leads USD10m Round for Brazil’s Genial Care

      January 13, 2023
    • Kayyak Ventures Leads USD10m Series A for Chile’s HealthAtom

      January 6, 2023
    • Kayyak Ventures Leads USD10m Series A for Chile’s HealthAtom

      January 6, 2023
    • IMPAQTO Capital Reaches First Close for USD2m Impact Fund 

      January 5, 2023
    • monashees and CapSur Capital Lead USD8m Round for Brazil’s The Coffee

      December 27, 2022
    • Brazil’s Paketá Secures BRL300m in Debt Financing from Milenio Capital

      December 14, 2022
    • Headline Leads BRL36m Round for Brazil’s Smart Break

      December 14, 2022
    • FEN Ventures and Innogen Lead USD7m Equity and Debt Seed Round for Peru’s Wynwood House

      December 14, 2022
    • Canary Leads ~USD4m Seed Round for Brazil’s Lastro

      December 14, 2022
    • Princeville Capital Leads USD70m Series D+ for Chile’s NotCo

      December 14, 2022
    • Alexia Ventures Leads USD16.5m Round for Brazil’s Seedz

      December 14, 2022
    • Gerdau Next Ventures and Inovabra Lead ~USD21m Series B for Brazil’s Docket

      December 14, 2022
    • Urban Innovation Fund Leads USD4.4m Seed Round for Mexico’s Plenna

      December 14, 2022
    • Gerdau Next Ventures and Inovabra Lead ~USD22m Series B for Brazil’s Docket

      December 7, 2022
    • Banco Santander Leads USD10m Series B for Chile’s Destacame

      December 7, 2022
    • Headline Leads ~USD7m Round for Brazil’s Smart Break 

      December 7, 2022
    • FEN Ventures and Innogen Lead USD7m Seed Round for Peru’s Wynwood House

      December 7, 2022
    • Chile’s Legria Raises USD6m From Chile Ventures, Genesis Ventures, Others

      December 7, 2022
    • Genesis Ventures, Amarena and Grupo Penta Invest USD6m in Chile’s Kredito

      December 7, 2022
    • Glisco Partners Leads USD27m Series B for Colombia’s Muncher

      November 23, 2022
    • DXA Invest and Arien Lead ~USD6m Series A+ for Brazil’s Aviation Platform Flapper

      November 23, 2022
    • Better Tomorrow Ventures and Metaprop Lead USD7.5m Round for Mexico’s Fintech Yave

      November 23, 2022
    • Lightrock Leads BRL145m Series B for Brazil’s Agrolend

      November 23, 2022
    • Mexico’s GoTrendier Raises ~USD15m Series B Led by IDB Invest, Creas Impacto and IDC Ventures

      November 22, 2022
    • Mexican Fintech Kapital Secures USD100m Debt Facility from Sivo

      November 8, 2022
    • Victory Park Capital and Industry Ventures Lead USD60m Equity and Debt Round for Mexican Fintech Mendel

      November 8, 2022
    • Mexico’s Quinio Raises USD40m in Equity and Debt Round

      November 8, 2022
    • Brazilian ERP Platform Ativy Secures ~USD24m in Venture Debt from Milenio Capital and Paramis

      November 8, 2022
    • FinTech Collective Leads USD10m Seed Round for Mexican Fintech mattilda

      November 8, 2022
    • KASZEK and DILA Capital Lead USD7.6m Round for Mexican Fintech Cicada

      November 8, 2022
    • Chan Zuckerberg Initiative Leads Series C for Brazil’s Beep Saúde

      November 8, 2022
    • Mexico’s Kukun Raises USD4.5m Round from FJ Labs, Antelo Capital and Others

      October 26, 2022
    • Colombia’s HoyTrabajas Raises USD5m Seed Round

      October 26, 2022
    • Lightspeed Leads USD5m Seed Round for Argentina’s Fidu

      October 26, 2022
    • Apollo Global Management Enters USD1.5b Financing Agreement with Brazil’s Embraer

      September 27, 2022
    • Fifth Wall Invests USD30m in Series C+ for Brazil’s Solfácil

      September 27, 2022
    • Globant Ventures invests ~USD1m in Uruguay’s Bunker DB

      September 27, 2022
    • Chromo Invest, Canary, Others Invest BRL9m in Brazil’s Civi; Canary Leads USD1.1m in Pre-seed Round for Mexico’s Bendo

      September 27, 2022
    • GSV Ventures Leads USD2m Seed Round for Peru’s uDocz 

      September 27, 2022
    • KASZEK and Y Combinator Leads USD5m Investment for Mexico’s DolarApp 

      September 27, 2022
    • Mexico’s Naya Homes Raises USD5.6m Seed Round From Carao Ventures, Clocktower Technology Ventures, Others

      September 27, 2022
    • Astella Leads BRL40m Series A for Brazil’s Amicci 

      September 27, 2022
    • Moore Capital Leads BRL40m Series A+ for Brazil’s BHub 

      September 27, 2022
    • monashees and Construct Capital Lead USD8.5m Round for Brazil’s Leoparda Electric

      September 27, 2022
    • Colombia’s RappiPay Secures USD11m Syndicated Credit Line from Bancolombia, Others

      September 27, 2022
    • Salkantay Ventures Reaches USD26m Final Close for First VC Fund

      September 27, 2022
    • Vinci Partners To Acquire Minority Stake in Brazil’s Efficopar 

      September 27, 2022
    • BTG Pactual To Acquire Brazil’s UPI Itiquira for BRL146.7m

      September 27, 2022

    About LAVCA

     

    LAVCA is the Association for Private Capital Investment in Latin America, a not-for-profit membership organization dedicated to supporting the growth of private capital in Latin America and the Caribbean through research, education, networking and advocacy.

    LAVCA Office

        New York City:
        589 8th Ave, 18th Floor
        New York, NY 10018

    Explore LAVCA.org

    • About LAVCA
    • Board, Team, & Advisors
    • Media
    • Contact Us
    • Membership Benefits
    • Members Only Access
    • Education and Programs
    • Research
    • Policy
    • LAVCA VC
    • Contact Us

    @2020 - LAVCA. All Rights Reserved.


    Back To Top