LP interview: Allstate branches out

In a sense, Allstate's private equity group can be characterized as a bellwether LP. A growing part of Allstate Investments, which manages some $100 billion for insurance and pension entities, the group is responsible for a diversified portfolio of more than $3.3 billion in exposure across 150 partnerships and meaningful investments globally.

Given that allocations to the asset class are ultimately funded exclusively by individuals writing monthly checks for Allstate insurance products, institutional capital flows have never been a factor. As such, the firm has been able to stay consistently engaged in the private equity business since the 1960s, regardless of tough times.

According to Peter Keehn, global head of private equity for Allstate, adjustments in strategy are therefore a real signal of fundamentally changed conditions.

"Because we're a captive fund, as we think through asset allocation in general - how much to privates versus publics, how much to stocks versus bonds, how much to alternatives - we can exercise a lot more freedom around portfolio construction, on optimizing it without the constraints of needing to match our investing activity to where we've been successful raising third-party money," Keehn tells AVCJ.

"Finding we have a lot less capital to invest because the people who backed us last time didn't back us this time isn't an issue - if we're out of money for PE, it's because we've chosen to allocate somewhere else."

Paradigm shifts

Two notable shifts have resulted. First, geographically, Allstate will become less reliant on the US (although for obvious reasons, dollar-denominated liabilities among them, it will remain the dominant slice). Already intentionally under-allocated to Europe, the firm has been gradually broadening its exposure to emerging markets since 2006, Asia and Latin America being the most prominent examples.

Second, Allstate is moving away from buyouts, though again, these will remain the largest single component of the PE portfolio. As the firm sees things at present, other strategies may be better fits for low growth conditions, such as mezzanine, distress and turnaround equity.

"That's different to the profile of managers we were backing in the up market," Keehn remarks. "And even in the buyout category, the players we favor now are those who have demonstrated a consistent ability to unhinge the revenues - and certainly the cash flow - of a business from the broader economic environment it exists in."

Allstate's appetite for alternatives generally is constrained by the fact that it is a listed insurance company. Although portfolio managers appreciate that alternatives have historically shown good returns, the associated risk means that asset allocation models restrict exposure. This is in stark contrast to the likes of endowments, foundations and even insurers that are mutuals and not publicly traded.

But this conservative bias delivers real defensive advantages in difficult times, for example, in limiting the downside fallout from the denominator effect. As many LPs with high exposure to illiquid alternatives were taken out of the market completely when the global financial crisis hit and denominators plunged in advance of numerators, Allstate was largely unharmed. Its asset base shifted under the stresses of the crisis, but the conservative allocation to private equity meant it was manageable.

In terms of actually deploying capital, Allstate doesn't use gatekeepers; that kind of work is done in-house. But the firm does partner with funds-of-funds, despite similarities between these and Allstate that might make this look odd at first glance.

The partnerships have two purposes. First, for investments in areas that portfolio managers don't see as critical to the mainframe portfolio construct but still warrant some exposure. Keehn cites the example of venture capital. Allstate has kept a relatively low allocation to this asset class for the last decade. However, in order to maintain this small presence in the fast-moving world of VC, a decision was made to buy expertise rather than expend resources to build it in-house.

Allstate's other, and more important, use for funds-of-funds is to spearhead investments in areas where it wants to build out a presence over time, notably ex-US markets. If the appropriate fund can be found, it can provide an ideal way to aggregate important local knowledge in fairly short order. That is a critical differentiator when the time comes for Allstate to choose local managers on their own bat.

First Europe, now Asia?

This approach proved very effective in the firm's earlier foray into Europe. "We were very open and specific with our European fund-of-funds partner from the outset, back in 2005," Keehn recalls. "We told them we anticipated Europe would be a building piece of our business, so we wanted them to manage money for us as a first step. And we made it clear that tuition was integral to the deal; meaning we'd ask a lot of questions, seek a lot of introductions and so on."

Allstate went as far as to say that it would probably end up opening an office in London, at which point the partner's services would no longer be required. This is exactly what happened and now the firm has its own team operating in Europe.

A couple of similar arrangements with fund-of-funds in Asia are already in place, and Keehn says an eventual upgrade to a formal operation in the region is very possible.

"As Asia becomes a much more important part of the global economy - and therefore a much bigger piece of the Allstate portfolio - these local resources are proving very helpful as we make our own direct commitments there and evaluate the potential benefits of a local presence."

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• Topics
• LPs
• Fund-of-funds
• Allstate
• Fund-of-funds