LP interview: Allstate Investments

Sometimes the numbers just don’t add up. The private equity team at Allstate Investments – asset manager to US-listed insurer Allstate – gets granular when a GP launches a new fund, seeking to break down the portfolio into dollars and deals per team member. The question is always the same: Does the GP have enough bandwidth to spend a year on the road raising capital and then deploy it efficiently while guiding existing investments to profitable exits?

“There are only 24 hours in the day, they can only do so many things, and they can only do a subset of those things right at any one time,” says Peter Keehn, head of PE at Allstate. “When capital is plentiful there is a strong temptation to come back as soon as you can, but it’s not always the right answer. We’ve had some good managers come back earlier than we thought they should, simply because they’ve run out of money as opposed to having completed the job on the prior fund.”

In Asia and globally, the discomfort about shorter gaps in between funds tends to follow one of two strands, Keehn explains. Some managers have realized investments, but the returns have come thanks to strong public markets, not because of GPs bringing about change in their portfolio companies. Others simply point to increased mark-to-market valuations for unrealized positions. In both scenarios, it is difficult for an LP to make a call on what performance is going to be like.

There are people with good track records that aren’t very deep and deep track records that aren’t very good

Becoming diversified

This phenomenon is not new to Allstate. The insurer started making direct private equity investments in the 1960s and adapted its model as fund managers emerged over the next two decades. Total assets stood at $81.1 billion as of March, and primarily comprise rated credit-oriented investments such as corporate loans and mortgages. There is a smaller allocation to risk capital in the form of public and private equities.

Private equity fund commitments were worth $4.14 billion, with an additional $161 million held outside of limited partnerships. The firm also had $1.52 billion in real estate and $350 million in timber and agriculture-related investments. The net IRR on this aggregate private markets exposure was 11.9% on a five-year basis and 9.5% on a 10-year basis.

Allstate has seen two significant shifts in its asset mix: from lending on assets to owning assets and from public companies to private. As a result, when Keehn joined the firm in 2003, his remit was to grow the private equity business. What was a North American buyout portfolio has gradually become diversified: growth capital, mezzanine and distress strategies were added, while steps were taken to enter Europe and then Asia.

“Asia is the fastest growing piece of our portfolio today. We think of the entire economy of a country as being investable by private equity and so GDP is the most relevant way of assessing market size. By any measure, Asia is large and only getting larger,” says Keehn. The emerging markets allocation from the PE portfolio is 10-15% and most of that is in Asia. A Hong Kong office was opened in 2014.

There are currently a dozen GP relationships in the region, split equally between pan-regional and country-specific managers. China and Korea account for the bulk of exposure, the latter because Allstate has made some relatively large co-investments in that market. The general policy on a global level is to deploy half the capital in funds and the rest in co-investments – usually alongside portfolio GPs – in any given year. There have been about half a dozen co-investments in Asia.

Allstate’s first commitment to a GP based in the region came in 2005, but expansion has been anything but smooth. Within a few years, valuations were all over the place and credit concerns abounded as the global financial crisis hit. Emerging markets emerged in a position of strength compared to other regions, but then currency volatility shook things up once again.

“We focused more on risks, took a pause and only really started going again in a more consistent way in 2011-2012,” Keehn says. “Part of that was evolutions internally, the hiring of people with more experience and knowledge of those markets. On the currency issue, we faced persistent headwinds until late last year and it’s only been this year that the wind has shifted more to our back.”

There is no venture in Allstate’s Asia portfolio – the team is not convinced it could build a VC program to a scale where it would be meaningful to the overall portfolio and get access to the best managers – and the firm has yet to make a Southeast Asia-specific commitment. “There are people with good track records that aren’t very deep and deep track records that aren’t very good,” Keehn observes. “We haven’t found a combination of the two, but I’m sure that in time we will.”

There is a willingness to back first-time managers that have spun out from established groups, but the short track records remain a challenge across Asia. It means that, when a private equity firm presents its strategy, intent and recent experience, the Allstate team must rely more on gut instinct than in other markets. Particular attention is also paid to how managers conduct company-level due diligence in terms of background checks, studying financial records and reviewing earnings quality. 

What goes up…

However, there are limits to how scrutiny can assuage concerns, particularly when a GP is seeking to raise a substantially larger fund, as has been the case with some of the recent pan-Asian vehicles. Keehn doesn’t expect the flow of capital into PE globally to abate until there is a meaningful increase in US interest rates. He notes that many LPs’ target returns were set when rates were much higher: the push into private equity is therefore a response to the fact that actuarial models no longer work.

The other factor that could lessen investor appetite is the asset class experiencing a protracted downturn. This would leave a lot of groups counting the cost of their over-exuberance.    

“To me, this market feels so much like 2006-2007 where people were just fundamentally misunderstanding the level of risk present in this asset class,” Keehn says. “We see that in the number of new entrants to the business, the significant increases in commitments, and people shifting from funds to directs without appreciating that the difference in volatility characteristics.”

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• Topics
• North America
• LPs
• Fundraising
• USA
• Asia
• Allstate