NEW YORK -- While advising caution, some pension fund executives are increasing their funds' exposures to international private equity.
A group of pension fund executives, each with close to a decade of experience investing in non-domestic private equity deals or partnerships, gave a bullish but wary assessment at a recent conference sponsored by Asset Alternatives Inc., Wellesley, Mass.
The $49 billion State of Michigan Retirement Systems, Ann Arbor, is considering investing up to 20% of its private equity portfolio internationally, said David Turner, administrator of the alternative investment division.
Its current allocation to international private equity is 16% of the fund's $8.2 billion in total private equity commitments, or about $1.25 billion.
It is "hard to say when" the Michigan system might commit to the investments, which could fall between $100 million and $1 billion, Mr. Turner said. The increase most likely will happen in two to five years, he said.
Apart from the herd
Eleven percent of the fund's total private equity exposure is committed to nine funds in Western Europe; 3% with two "relationships" in Latin America; and 2% in an Asian fund of funds.
Its portfolio has a market value of $4 billion representing close to $8 billion in commitments, he said.
Investors must show caution, he said, noting that "in foreign or emerging markets, there are unique pitfalls in each partnership." Investors must "avoid the herd mentality" and be patient when expecting returns.
Mr. Turner added that in Europe he would favor a pan-European approach over investing in country-specific private equity funds. "There are emerging opportunities there, but again that goes back to the manager," he said. "We feel uncomfortable with individual countries."
The fund is in the early stages of looking at three or four deals in Japan and Asia, he said.
General Motors Investment Management Corp. has no specific allocation to international private equity and invests opportunistically, said Charles Froland, a managing director for New York-based GMIMCo, which oversees the $80 billion defined benefit plan of General Motors Corp.
'In the discovery stage'
GMIMCo invested close to $1.25 billion last year in private equity and now has about $6 billion in commitments. Fifty-five percent is in buyouts; 10% is in direct investments; 18% is invested internationally; and 17% is in venture capital.
GMIMCo so far this year has invested in a distressed debt fund in northern Asia, said Mr. Froland, who declined to name the fund or the amount invested.
He said GMIMCo is "still in the discovery stage" with other deals, which range between $100 million and $150 million or lower.
"Rule of law is a key," he said. GMIMCo also looks for local and seasoned managerial talent when investing in private equity deals overseas.
If a pension fund is going global with private equity, beware, said Serge Desjardins, director of investments for the Caisse de Depot et Placement du Quebec in Montreal.
Good or bad infrastructure of a country can play a large part in a the success of an overseas deal. "Developing economies need roads, bridges and power," he said. And at home, the Caisse this year invested Canadian $250 million (U.S.$172 million) in the privatization of Highway 407 in Toronto.
Putting money to work
Pension funds and endowments also must be prepared to make significant bets to private equity. If a pension fund has "only 1% (of assets) in private equity, it doesn't make sense," said Ad J.C. van den Ouweland, senior investment manager, equity investments, with the $50 billion Pensioenfonds PGGM in Zeist, Netherlands. "It makes sense to put money to work."
PGGM has a target allocation of 6.5% to private equity, most of it outside of the Netherlands. It has committed 5% of assets, and 2% of its assets are invested.
In 1994, PGGM took its "first step in Asia," he said. The deal "was one of the most challenging we ever made."
Institutional investors need to watch the difference in "valuation guidelines" among the United States, Europe and Asia, he said.
Another challenge is the "lack of liquidity and price information."
Institutional investors also must contend with "a lack of historic data" of partnerships and funds of funds.
In the United States, data date back to the 1960s, but such information is just now coming out of Europe.
Mr. van den Ouweland said PGGM will add "a few names to its portfolio" in 1999 and 2000, with the average commitment being $100 million.
Institutional investors also are watching Japan as the next potentially booming private equity market, the panel said.
Japan historically has closed its doors to foreign managers and investors looking to lead private equity deals. But that might be changing.