International private equity is hot -- and institutional investors are finding several ways in.
Some invest directly, while others use funds of funds or rely on consultants to find investments for them. But no matter the method, some pension funds and endowments are looking to add to international investments in private equity portfolios.
The $25 billion Colorado Public Employees' Retirement Association, Denver, had $1.9 billion in alternative investments, about 7.1% of the plan's total assets, said John Dominguez, director, speaking at a private equity conference sponsored by Asset Alternatives Inc., Wellesley, Mass. It has 1.3% of total pension fund assets invested in international private equity.
Colorado Employees has invested in the global private equity markets in a variety of ways.
Sixty to seventy percent of its non-U.S. funds are invested directly, with the remainder through funds of funds, where fees are higher.
The tradeoff for the fees is better information and investing with known managers, he said.
"I think this is a business of evaluating people," he said. "It's hard to get quality information. We're willing to pay to get access."
Colorado Employees made its first international private equity commitment in 1990 through a fund of funds, he said. Since then, the system "has continued on that path."
It's important "to maintain close and active relationships with partners," he said. Fund executives "participate on adviser committees" with private equity partnerships.
In 1995, the Colorado fund invested in buyout funds in the United Kingdom. Returns are "bearing out," he said, but the system has slowed its investing there.
Institutional investors have routinely commented recently that too much capital is chasing too few private equity deals in Europe.
"It's an organic market," Mr. Dominguez said. "There's only so much capital Europe can take."
The fund started investing in Southeast Asia in 1996, right before the region's economies collapsed. "We were wrong," he said.
The region now, however, is seeing opportunities because of corporate restructuring and distressed debt funds.
In Latin America, he said, the supply and demand for private equity funds of funds appears to be in balance. "Companies are looking for long-term capital," he said. It is "too early to tell" how those investments are doing because the fund had just started investing there, he said.
The Colorado fund has 52% of its international private equity assets in Western Europe; 23% in Asia; 21% in Latin America; and 4% in other markets.
While looking at deals, Colorado Employees is standing pat at investing 7% of assets in private equity, Mr. Dominguez said.
The Teachers Insurance and Annuity Association-College Retirement Equities Fund, which manages $220 billion in pension assets, is looking to become a big player in the international private equity market. Thirty percent of TIAA's private equity portfolio has been allocated to international investments.
New York-based TIAA, the fixed-income side of the pension manager, has $1 billion committed to 42 partnerships, said Sheryl Schwartz, managing director. Thirteen of those are international, representing $340 million in commitments.
It has two investments in international funds of funds. For the most part, the staff has been making direct investments, she said.
TIAA is looking to build a $2 billion to $3 billion private equity portfolio in the next five years, Ms. Schwartz said.
On the international side, TIAA has a lot of work to do to meet that goal. It has a three-person private equity staff. She stressed, however, the private equity team has a huge team of investment professionals from the rest of the company with which to work.
TIAA is underweighting U.K. buyout funds at the moment. Prices of deals have risen as big U.S. firms have entered the market, she said.
But it is looking for pan-European funds in the middle market range of $50 million to $500 million, as well as venture cap deals.
TIAA also has two small commitments to venture capital funds in Israel, and two "very large" commitments to distressed debt funds in Japan.
The $2 billion endowment of the Memorial Sloan Kettering Cancer Center, New York, is looking to increase its commitment to international private equity to $300 million from its current $180 million, said Michael Gutnick, senior vice president.
The endowment relies on consultant Cambridge Associates Inc. to complete the lion's share of due diligence on private equity deals. It invests in only one fund of funds.
