LAVCA spoke with Timothy T. Yates, Jr., Managing Directory of Commonfund Capital about their commitments to LatAm dedicated funds, including ~US$70m to four GPs in the last five years, and how the the region’s macro-economic state is a compelling entry point for new capital.
LAVCA: Please give some background on Commonfund. Who do you represent/who are your clients? What is your AUM? What percentage of your portfolio do you allocate to emerging markets private equity and to Latin America private equity specifically?
Yates: Commonfund Capital, Inc. (“Commonfund Capital”) is a global private capital solutions provider that invests with value-creating partners into primarily small- and mid-sized companies. Since Commonfund Capital’s founding in 1988, its mission has remained the same: to provide investment solutions in private equity, venture capital, and natural resources. Commonfund Capital offers investors private capital portfolios through primary investments, secondaries, and co-investments and builds investment programs by partnering with private capital firms. As of June 30, 2016, Commonfund Capital manages US$15.4 billion in private capital commitments since inception. Commonfund Capital has committed over US$850 million to the emerging markets, with over US$72 million committed specifically to Latin American private equity managers.
LAVCA: How does your role as a private nonprofit representing endowments and other institutional investors effect your investment strategy and risk appetite?
Yates: The Common Fund for Nonprofit Organizations (“Commonfund”) is a tax-exempt membership corporation operated by and for its member colleges, universities, and independent schools. Members of Commonfund are not shareholders of Commonfund. Member fees and other proprietary revenues of Commonfund support the organization as a whole and are not allocated for the benefit of particular funds or private owners. This enables the firm to align its interests with those of its clients and lets it focus its attention on institutional asset management through its registered investment adviser subsidiaries. The client base that the firm serves is important to managers who value partnering with a firm with a 40 plus-year history dedicated to serving long-term mission based and membership organizations. The firm’s investors have a high bar for returns and how those returns are generated in an ethical and socially responsible way.
Commonfund Capital made its first U.S. private equity investment in 1988, its first European investment in 1991 and its first investment in emerging markets in 1994. Commonfund Capital has one global bar against which it evaluates all managers across all geographies, as well as measures the success of all of its investments. Commonfund Capital is fortunate to be a consistent investor with many private capital funds in the world. Commonfund Capital’s history provides it with better knowledge of the industry, deeper relationships with managers, and preferred access to investment opportunities.
LAVCA: What is the typical size of commitment you make to a fund?
Yates: Across all of its programs, Commonfund Capital’s average commitment size (excluding secondary transactions) has been ~ US$18m to underlying managers. Our average commitment (excluding secondary transactions) to Latin American managers is ~US$11m.
LAVCA: Commonfund invests across developed and emerging markets. How do you balance your emerging markets portfolio with your developed market targets? Given the shift in markets over the last couple of years, how do you view emerging markets (and LatAm specifically) in a global context?
Yates: The private equity opportunity set is global. As a result, Commonfund Capital advocates constructing portfolios that are varied by geographical location, strategy, stage, and manager. Commonfund Capital seeks to invest with managers that implement best practices from the top-tier U.S. or global managers.
While emerging markets are often grouped as a single category, no two countries follow the same economic growth path. Thus, they present different opportunity sets and risk-return profiles. Commonfund Capital believes it is important to select investment strategies best suited for each country or region in order to maximize return potential and maintain a balanced diversification to mitigate unseen geopolitical or economic risks.
Latin America is a key focus area in Commonfund Capital’s emerging markets portfolio. Approximately 50 million people have joined the middle class in the last decade in Latin America, fueling domestic demand for better goods and services, including healthcare, education, and entertainment. Commonfund Capital believes that the greatest opportunities are in Brazil, Chile, Colombia, Uruguay, Mexico, and Peru, as well as in companies that operate on a pan-Latin basis.
Latin America is a key focus area in Commonfund Capital’s emerging markets portfolio. Approximately 50 million people have joined the middle class in the last decade in Latin America, fueling domestic demand for better goods and services, including healthcare, education, and entertainment. Commonfund Capital believes that the greatest opportunities are in Brazil, Chile, Colombia, Uruguay, Mexico, and Peru, as well as in companies that operate on a pan-Latin basis.
LAVCA: What commitments have you made to Latin America-dedicated funds to-date? What attracted you to these funds?
Yates: In the last five years Commonfund Capital, through its funds, has committed ~US$70m to four general partners (GPs) in the region. Two of these GPs are Brazil focused funds while the other two are more pan-regional in nature.
LAVCA: Are you looking to increase, decrease, or maintain your investments to Latin American funds? Why?
Yates: Commonfund Capital anticipates maintaining its investments to Latin American funds. Its first dedicated emerging markets fund targeted approximately 20-25% of commitments in Latin America, and we expect that its second dedicated fund will have a similar level of exposure.
Macro-economic growth in Latin America has slowed; however Commonfund Capital believes that there are compelling entry points for new capital, which may be invested at depressed currency levels and lower valuations. Recent investments made by our Latin American managers support this theme and are reflective of the fundamental consumer growth story.
LAVCA: Do you seek out certain strategies or sector specific funds globally? How does that translate to your strategy in LatAm?
Yates: Long-term returns in emerging markets are driven primarily by four key factors: the dramatic expansion of domestic consumption by an accelerating middle class; the potential for market leading companies in high growth niche areas; portfolio diversification and potential outperformance to public markets; and the opportunity to access investments generally not found in the public markets. Latin America offers the opportunity for control transactions (buyouts) of family-owned businesses as well as corporate spin-outs and growth equity investments. Recently, Commonfund Capital has seen the emergence of a venture capital market, but it remains at a nascent stage versus other emerging markets.
LAVCA: How do you seek exposure to emerging markets? Have you pursued global, regional, or country-specific funds?
Yates: Commonfund Capital’s emerging markets portfolios are domestically orientated to take advantage of regional opportunities. The portfolios offer diversification relative to public markets through access to different growth drivers and thus potential for outperformance. Many domestically-oriented companies that target the emerging middle class continue to grow and have tangible business and monetization models with reasonable valuations.
Commonfund Capital has pursued both country-specific and regional funds, as well as companies that operate on a pan-Latin basis. It takes a targeted approach to portfolio construction and, as a result, intentionally builds its emerging markets portfolio to not look like the MSCI Emerging Markets index. The investments tend to be more focused on smaller private companies targeting the domestic consumer.
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?
Yates: A rigorous due diligence process is central to Commonfund Capital’s ability to identify managers. There are many factors considered; however, Commonfund Capital believes the most important driver of a manager’s return is its ability to add value to the underlying companies in their portfolio.
Qualitatively, Commonfund Capital evaluates the manager’s organization, quality and team experience, and adherence to investment philosophy and process. Quantitatively, Commonfund Capital analyzes historical performance, value-add, and meaningfulness of managers’ personal financial commitment. Fundamental to our process is access to managers that are quality performers and concentrated diversification through disciplined portfolio construction.
Commonfund Capital will review first-time funds as well as more experienced teams. It has a selective process to filter the best opportunities and build relationships with firms that demonstrate honesty, integrity, sound investment judgment and that exhibit a host of solid investment and management skills. Commonfund Capital’s reputation as a knowledgeable and insightful partner often leads to direct referrals from GPs and LPs, enabling it to access some of the most interesting and up and coming managers in the industry.
LAVCA: What role does ESG play in your strategy and/or fund manager selection?
Yates: Commonfund became a signatory to the Principles of Responsible Investing (“PRI”) in 2013 to formally focus on ESG. As a signatory, we are required to report on the ESG adoption of our managers. Earlier in 2015, Commonfund Capital expanded its manager recommendation process to include an ESG checklist section where managers are evaluated on 11 different binary questions that explore the extent of their ESG policies. These checklists are recorded and stored in Commonfund Capital’s internal database and a dedicated, qualitative ESG section is incorporated in every recommendation. The firm is an advocate for PRI and continues to speak with active managers annually on updates to their ESG policies through formal communications, including their accounting/back office operations.
LAVCA: What advice would you give to managers looking to work with Commonfund?
Yates: Commonfund Capital has been able to partner successfully with many sought-after investment firms in private capital. Its second dedicated emerging markets fund will have exposure to a limited number of newer, promising private capital managers that have the qualities required to outperform benchmarks:
• A strong management team,
• A focus on capital efficiency, and
• A differentiated investment strategy.
Commonfund Capital generally favors relatively smaller fund sizes where the alignment of interests between limited partners and general partners is strong. As a result, Commonfund Capital welcomes the opportunity to meet with new firms that meet our “one bar” approach.