Pension funds, such as those of GTE Corp. and General Electric Co., are seeking direct stake investments in red-hot developing countries.
The timing is no accident, as interest in emerging market equity investments proliferates. But some funds are looking beyond publicly traded stocks to direct company investments in places like China, India, Southeast Asia, Latin America, Eastern Europe and, in some cases, Africa, where markets may be small, hard to penetrate or already pricey.
Or in some cases, funds may be attracted to specific deals - like the pension funds of Dayton-Hudson Corp., Northern States Power Co. and others that have invested in timberland outside the United States.
Typically, investors such as the $17 billion Oregon Public Employes' Retirement System, Salem, and the $13 billion pension fund of GTE Corp., Stamford, Conn., prefer to use pooled vehicles to take direct stakes abroad.
The Oregon system invested a total of $50 million in two such limited partnerships - the $250 million Hancock International Private Equity Partners (a fund of funds), and the $170 million Asia Pacific Trust in Hong Kong.
GTE's pension fund recently made unspecified investments in limited partnerships targeted for China and Southeast Asia, said John Carroll, president of GTE Investment Management Corp., which oversees the GTE pension fund.
"We believe these are appropriate means of diversification, and there is a reasonable expectation that returns in that area (of Asia) will be superior to returns in most other areas of the world," Mr. Carroll said.
GE Investments seems to share this perspective. That $45 billion organization, which manages General Electric Co.'s $27.5 billion pension fund, has signed on as a partner with Tiger Management Corp., New York, in the new Tiger International Fund. The Tiger Fund hopes to raise $1 billion to make direct investments in Asia and other emerging markets.
"We already have a significant presence in emerging markets through our international stock portfolio. But those markets are thin and have limited liquidity," said John Myers, executive vice president, GE Investments, Stamford, Conn. "We want to supplement those investments in the public stock markets with direct investments - much as we have been doing in the U.S. over the last 15 years."
Not all investors are pooling assets for taking direct stakes.
One unidentified New York-based money management firm with about $10 billion under management is poised to invest $8 million for an 80% stake in Pushpa Polymers Private Ltd., Bombay, India, which is seeking to erect a polystyrene plant in Gujarat, India. The expected payoff: about a 50% internal annual rate of return on equity, if certain assumptions are met, said Philip Stevenson, president, International Equity Partners L.P., Washington, the financial adviser to Pushpa's U.S. parent.
Still, many pension funds prefer to take direct stakes overseas through some type of pooled vehicle, often either a limited partnership or a closed-end fund. While exact figures on the amount of money going into direct foreign investments are hard to come by, Ian Wilson, editor of the Micropal Emerging Market Fund Monitor, Providence, R.I., estimated that in the closed-end fund category there is somewhere in the neighborhood of 350 direct investment funds - worth roughly $10.5 billion - for developing countries.
Of today's 46 China funds alone, 13 have some direct investments, said Mr. Wilson. According to other sources, private equity funds - in planning and in existence - for Latin America total more than $1 billion.
Resource Investments Inc., West Lebanon, N.H., has put together two closed-end funds for investing in specific non-U.S. timberland deals: the first one was a $110 million fund that closed in January 1992; the second was a $125 million fund that closed last summer. In the first fund, 10 U.S. institutional investors (mostly pension funds) made a 49% asset purchase for long-term cutting rights and fee ownership of a radiata pine plantation in New Zealand owned by Fletcher Challenge Ltd., Auckland. In the second fund, nine investors took a 49% equity stake in Tasman Chile, a Chilean timber and newsprint producer in which Fletcher Challenge is the joint venture partner, said Stephen Hurley, senior vice president of Resource Investments.
Among the funds investing in both deals: the New Hampshire Retirement System, Concord, and the pension funds of National Fuel Gas Co., Northern States Power and Dayton-Hudson.
The $442 million Dayton-Hudson pension fund, Minneapolis, invested $10 million in both the Chilean and New Zealand timberland deals - representing its second and third (in total) timberland investments - because "we find the characteristics of timberland investing quite compelling for a long-term investor like the Dayton-Hudson fund," said Wayne Wicker, manager of investments. "Over the long term, we expect these investments" in Chile and New Zealand to produce even better returns than their U.S. timberland counterparts, he said. These foreign investments are expected to produce a real annual return of about 12%, compared with an expected 8% real return for U.S. timberland investments, according to Resource Investments.
For Dayton-Hudson, the non-U.S. timberland investments were its first overseas direct-stake investments. The fund has 10% of assets in listed foreign equities. But the situation is different for the $1.2 billion Northern States pension fund, Minneapolis, which also invested $10 million in both the Chilean and New Zealand timberland deals. Fund executives classify the deals as alternative investments; the fund has no segregated non-U.S. equity portfolios.
"We periodically review (the attractiveness of) foreign stocks but conclude that non-traditional (usually limited partnership) investments are likely to produce (higher) returns than foreign stocks," said Arland Brusven, the company's vice president-finance and treasurer.
He said the fund is analyzing another "non-traditional" foreign investment he would not identify.