GIC Opens Brazil Office | Chief Investment Officer

(April 1, 2014) — GIC, one of Singapore’s sovereign wealth funds, has opened an office in São Paulo, Brazil.

The new location is its 10^th regional office, and will be headed by Dr Wolfgang Schwerdtle.

In a statement, GIC said the new opening reflected its commitment to Latin America. In particular, the sovereign wealth fund was interested in opportunities in real estate, healthcare, financial and business services, natural resources, and infrastructure.

“Our presence in Brazil will enable our partners to engage early and interact closely with the GIC team, which is very beneficial for complex and sizeable investments,” said GIC Group Chief Investment Officer, Lim Chow Kiat.

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“We believe our partners will gain from having access to GIC’s global network of business contacts and market insights. Although emerging markets remain volatile, we are confident of the long-term Latin America growth story.”

Group President Lim Siong Guan added: “GIC’s presence in Brazil is another step in our strategy to be present in key financial capitals around the world. Local partners and insights add to our global understanding of value investment opportunities.

“To stay ahead in an increasingly competitive landscape, we will continue to leverage our ability to invest on a multi-asset class basis, respond quickly to investment opportunities both large and small, and adopt a long-term view in our investment commitments.”

Investors establishing regional bases was highlighted in the February edition of aiCIO. The Canada Pension Plan Investment Board, which already had offices in Hong Kong and London, opened its São Paulo office in February, and the Alberta Investment Management Corporation revealed it had opened a London office at the beginning of the year. Dutch investment giant APG also has offices in New York and Hong Kong.

Not all of the world’s largest investors are jumping on the bandwagon however: the California Public Employees’ Retirement System and California State Teachers’ Retirement System (CalSTRS) have considered opening regional offices several times, but have ultimately been hamstrung by the bureaucracy of being a governmental fund.

Chris Ailman, CIO of CalSTRS, told aiCIO: “There’s just no way, given the governance structure. Virtually all of the large public funds in the US were set up in the 1970s as divisions of governmental agencies. Smart business decisions such as setting up global offices are common sense for a money manager, but nearly impossible for a governmental agency.

“If you look at us through the lens of a governmental entity and compare us with the department of licensing, our structure and operation look expensive. That’s because we are not a state entity in that way—we’re a money manager, a global money manager who has to compete with global entities. If you look at us through the lens of a Wall Street money management firm, you would be shocked the other way at how inexpensive and frugal we are.”

Separately, reports of GIC’s former CIO Ng Kok Song receiving seed money for his new hedge fund from the sovereign wealth fund have appeared in the press.

Song, who remains an advisor to the fund, is believed to be rolling out a macro hedge fund later this year. GIC’s press office could not be reached for confirmation at the time of writing.

Related Content: Exotic Aspirations and Power 100: Lim Chow Kiat

(April 1, 2014) — Investors tempted by co-investment deals in private equity assets should watch out for concentration risk and poor returns, according to Altius Associates.

Co-investment deals see investors buying a direct stake in a company alongside a private equity fund. They have become popular with institutional investors in recent years, due to the advantages they offer, including: avoiding annual management fees; capturing the full upside by not paying carry; the mitigation of the ‘J’ curve phenomena; immediate deployment of capital; and control of investment/sector exposure.

For those selling the co-investment deals, the partnerships provide a way for buyout firms to raise capital. Firms including BC Partners, EQT Partners, Cinven, and Permira have all offered fee discounts to investors that take part in a first close.

Some of the world’s best known private equity investors—including PGGM, F&C Investments, Abu Dhabi Investment Authority, Partners Group, AlpInvest Partners, Pantheon, and Hermes GPE—are known advocates of co-investments.

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And last year, the London Pensions Fund Authority completed its first ever private equity co-investment, teaming up with Swiss private equity manager Adveq to buy a stake in postal company Secured Mail.

However, a study carried out by Altius that analysed 886 realised US buyout and growth investments—ranging from 1979 to 2010—showed that for a co-investment portfolio made up of 10 assets there was a substantial probability that the entire portfolio would generate an internal rate of return (IRR) of less than 0%.

Even with a 20-company co-investment portfolio, it was possible to lose significant capital as measured by either IRR or multiples.

Author of the study and Head of Americas Investment at Altius Dr William Charlton said: “As with most aspects of private equity, selectivity is one of the most important components of driving returns for investors. But even with good choices, co-investment portfolios may be subject to additional risk due to the impact, positively or negatively, of a small number of transactions in the portfolio.”

Altius’s research revealed two inherent risks. For general partners (who retain management control, share the right to use partnership property, share the profits of the partnered firm, and have joint liability for the debts of the partnership), there may be an incentive to keep the highest expected return investments wholly within the fund structure.

But adverse selection may occur when funds offer co-investment in deals that exceed fund capacity, which may put the fund manager in a market segment for which past returns are not representative and are more uncertain.

For limited partnerships, (where partners have limited liability, no management authority and are only liable on debts incurred by the firm to the extent of their registered investment,) Altius identified substantial concentration risk. Limited partners tend to only invest in a subset of a manager’s portfolio, leading to an over-concentration of investment in a small number of companies, it said.

“While there may be important strategic reasons for institutional investors to establish or expand co-investment programmes, care should be exercised to avoid the issues of intentional or unintentional adverse selection,” Charlton continued.

“Even if adverse selection can be avoided, there should be an appreciation for the nature of the risk inherent in a portfolio that contains a small number of risky investments that are likely to be highly correlated.”

Despite the risks, it seems investors’ appetite for co-investment private equity deals is on the rise. Data from Preqin released last month showed half of the private equity investors it questioned were planning to increase their exposure to this type of deal in 2014.

Today, 40% of investors Preqin spoke to are actively co-investing, while 37% are co-investing on an opportunistic basis. Another 16% are considering co-investing in the future.

However, in direct contrast to Altius’ expectations, 77% of investors expected their co-investments to outperform their fund investments by 2.6% or more, while no investors expect them to perform the same or worse.