WASHINGTON - A group of institutional investors considered to be at the vanguard of investing in new strategies and markets want to place hundreds of millions in international private equity, particularly in emerging markets.
Representatives from the pension funds for General Motors Corp., BellSouth Corp., General Electric Co., IBM Corp. and AT&T Co., as well as the Ford Foundation, said they will increase international private equity investing or are exploring opportunities to do so.
The investors divulged their intentions during Merrill Lynch & Co. Inc.'s third annual Global Private Equity conference held in Washington.
"International private equity is the largest trend within our business," said Kevin Albert, Merrill's managing director of private equity.
According to Merrill Lynch, attractive areas and industries around the world include investments in energy and basic industries in Asia; consumer and capital goods investments in Latin America and sub-Saharan Africa; and investments in utilities and basic industries in emerging Europe.
The $80 billion pension fund for General Motors wants to invest $600 million in international private equity over the next three to four years, said Susan Flynn, portfolio manager, international private equity, with General Motors Investment Management Corp., New York.
Europe will receive 50% of that amount, with the balance split between Asia and other emerging markets, said Ms. Flynn.
"We will commit about $900 million in order to reach that $600 million level," said Ms. Flynn.
GM began investing in international private equity in 1988, and had a total of $260 million invested by 1994 before reassessing the program, Ms. Flynn said. The fund now has $445 million in investments and unfunded commitments.
Richard S. Kraich, manager, private equity investments, for the $20 billion BellSouth pension fund said his fund is emphasizing international private equity over domestic.
The Atlanta-based fund is looking strongly at Europe and Latin America, said Mr. Kraich. Europe, he said, could be considered an emerging market for private equity because its public markets - which ultimately offer an exit strategy - are still developing.
The $45 billion pension fund for General Electric, Stamford, Conn., has invested $400 million in international private equity, beginning just a few years ago, said James Mara, senior vice president with General Electric Investment Co., the investment subsidiary. The fund makes direct co-investments, said Mr. Mara.
"We want to take it up to $1 billion," he said. "We are not in a hurry.
"We find local partners and then opportunistically back them. We put up between $30 million to $50 million at risk with those partners."
GE does not use a country or regional allocation because it invests opportunistically, said Mr. Mara. There will be occasions when a region or a country is disproportionally represented in the portfolio, he noted.
"As you build a portfolio, you may have more of an exposure in Latin America, for example, because that is where the opportunity is," he said. "You will have more exposure in the short term than you want to have overall during the long term."
GE is exploring opportunities in Argentina and Brazil, with the former being more attractive.
"We are close to establishing a relationship in Brazil to allow us to begin investing there in 12 months," said Mr. Mara. "The macro-economic risk is higher today in Brazil than Argentina, so I expect to see higher returns there."
The high growth rates experienced by some of the economies of Asian countries have attracted the attention of the Ford Foundation and the IBM pension fund. Both funds have invested there as a means to gain a toehold. The results have been mixed.
"In the long run, China holds significant opportunity," said Kristen Krohg, a consultant with Cambridge Associates Inc., Boston. "A lot of money went into (China) funds in 1992, but not much money is coming out."
The New York-based Ford Foundation has $50 million invested in five Asian funds, said Betty Fagan, director of private equity.
"I consider it seed money," said Ms. Fagan. "The only way to learn is to put money there and pay the price of getting to know the markets.
"It is a people-intensive and labor-intensive form of investing. My expectations are quite low, but I am a patient investor."
"I am fully committed to Asia," said Ms. Fagan. "Whether it is five or 10 years from now, those markets will be there."
The Ford Foundation is a taking a long-term approach to Asia because the changes that need to occur to make its investments rewarding don't happen overnight, said Ms. Fagan.
"They need public markets that can provide liquidity. You need to develop private equity players. There is a huge supply/demand imbalance for people to do the work," she said.
"Private equity funds in Asia have a difficult time staffing their offices because the demand for them is so high."
Ms. Fagan notes there are wealthy Asian families that have made successful private equity investments across the region, and that investing with them would be attractive. But these families lack the criteria - a verifiable track record for instance - that would give the Ford Foundation and other U.S. institutions comfort.
"If I were investing my own money, I would invest in a heartbeat," said Ms. Fagan. "(But) I am a surrogate for a U.S. institution."
Betty Sheets, senior manager, private investments of the $43 billion pension fund for IBM, said she inherited a small Asian private equity portfolio when she joined the Stamford, Conn., pension fund a few years and had intentions of growing it.
"It hasn't happened," Ms. Sheets said. "I have made one commitment.
IBM's investment results in Asian private equity have been mixed, she said. "You need an incremental return for going to Asia."
Ms. Sheets said a professional managerial class responsive to shareholders instead of family members has to be developed. "We need to get to a stage where there are opportunities of scale," she said.
IBM also shuns a set allocation and prefers to invest opportunistically, said Ms. Sheets. Regional funds are preferred, although a country with a large population and diverse industries like Indonesia is attractive, she said.
"We are looking at one fund there seriously," said Ms. Sheets.
Regionally, Oceania is more attractive now than China, said Ms. Sheets.
Merrill Lynch also introduced at the conference a benchmark that will measure the performance of international private equity.
The benchmark complements one the firm created for domestic private equity three years ago.
Merrill's benchmarks are proxies that use publicly traded securities with similar characteristics to private equities to measure performance, according to Richard Bernstein, director of quantitative research with Merrill Lynch.
Private equity benchmarks that are constructed using the actual partnership securities data are inferior because they contain a survivorship bias, said Mr. Bernstein.
"It's futile to get information on every deal," said Mr. Bernstein. "People will only report the good news. We had to find a way to get around that."
To circumvent the survivorship bias, Mr. Bernstein created a benchmark of publicly traded equities that were volatile, had little of the risk associated with the market and were lowest in trading volume.
The result was a benchmark of 100 to 150 stocks - it is rebalanced monthly - culled from the Wilshire 5000, dating to 1980.
The Morgan Stanley Capital International Europe Australasia Far East Index was the universe used for the international benchmark, but the data were limited to the last four years because of the inferior quality of information from some of those markets, said Mr. Bernstein.
Mr. Bernstein screened for stocks in the top two quintiles in volatility and in the bottom two quintiles in liquidity and analyst coverage, coming up with an index of between 30 and 100 stocks, depending on the period.
The private equity proxy benchmarks concluded U.S. private equity investments have provided high returns with high risk but with substantial diversification; international private equity diversifies a U.S.-based private equity portfolio; and international private equity can diversify an EAFE-based or Standard & Poor's 500 Index-based equity portfolio.
Officials at the Ford Foundation and the pension funds of GM, BellSouth, GE, IBM and AT&T apparently agree.