LP interview: PGGM

With approximately EUR190 billion ($208 billion) in total assets, Netherlands-based PGGM is the third-largest pension investor in Europe. It commits about EUR2 billion to private equity every year but until relatively recently the entire allocation went to AlpInvest Partners.

PGGM changed tack in 2009 with the decision to sell its interest in AlpInvest and bring private equity coverage back in house. This was made in tandem with ABP, another Dutch pension fund and PGGM's partner in the acquisition of the fund-of-funds nine years earlier. In 2010, PGGM officially launched a PE investment division that commits capital directly to funds.

Three members of the 15-strong team of investment professionals are responsible for an Asia portfolio that is now worth about $1 billion. PGGM aims to deploy 10% of its total assets across both regional and country-focused funds in China, Japan, Korea, India and Australia.

"We started committing to country-focused funds first," says Jeroen Meewis, senior investment manager for private equity, who joined PGGM four years ago. "At a later stage, we committed to pan-regional funds. If we don't find any suitable GPs in certain countries, we won't make allocations to funds in those countries."

Concentration question

Regional funds have particular appeal because of the flexibility they allow in terms of shifting capital towards the most attractive geographies at a time when some markets are still volatile. Size is also a factor. PGGM invests at least EUR50 million per fund and can account for up to 25% of the corpus. The minimum fund size is $500 million.

Since 2010, the pension fund has established 10 GP relationships in Asia, comprising four pan-regional and six country-focused managers. They include China's CDH Investments, Multiples Alternate Asset Management in India, and regional players KKR, CVC Capital Partners and Affinity Equity Partners.

"There is an internal debate about building an even more concentrated portfolio," says Meewis. "We have a preference for buyout markets, where there is a stable liquidity flow. We are therefore particularly interested in opportunities in Korea, but also in Japan and Australia. In the latter two markets there is a preference for mid-market funds."

PGGM also sees a slow shift from a minority to control investments in the emerging markets of China and India, driven by issues such as succession-planning challenges faced by first-generation entrepreneurs.

"However, not every manager is capable of doing control deals - it requires a more operationally-focused and hands-on mindset," says Meewis. "Control deals aren't always better than minority investments, which require strong sponsors who are dedicated to their businesses. In that sense, we would like managers, especially in China and India, to maintain flexible strategies that cover buyout and growth capital."

With buyouts in China still at a nascent stage, few deals are available and this drives up the valuations. A number of GPs are venturing overseas in search of technologies and brands they can acquire and bring to their domestic market. While PGGM sees the potential of scaling up a business in China as compelling, it is skeptical as to whether this cross-border strategy can translate into fruitful net returns.

"We have seen some Chinese players pay up for auctioned deals overseas, where they compete with local GPs we have backed in those geographies," Meewis adds. "Ultimately, those companies are very local businesses. It's not easy for a Chinese GP to export a business model and bring it into a country which is culturally different. Those deals do carry certain risks."

While the fierce competition that has characterized the China market in recent years is easing, some GPs are still challenged in their scope to introduce operational improvements or steer companies to exit. Although the embargo on new share issues ended last year, there is still a long backlog. The situation is similar in India, where many GPs have yet to deliver meaningful distributions, despite a slight improvement in the exit environment.

"I'm not that keen to back GPs that have large unrealized portfolios," says Meewis.

Furthermore, from PGGM's perspective, Indian PE funds compete directly with the public markets, which are highly valued. "Unlike most other markets, even many smaller-sized companies have the option to list their shares. But most publicly listed shares in India are relatively illiquid," Meewis explains. "Now we very much look at how disciplined GPs are in timing and valuing their investments. There was a small window of opportunity with more reasonably priced transactions."

Nevertheless, he is encouraged by the reduction in India's current account deficit - currency volatility is a concern for all LPs in US dollar funds - and the ability of certain GPs to pick companies that go on to demonstrate impressive revenue and earnings.

The direct route

As is the case with many LPs, in recent years PGGM has started paying more attention to co-investment with a view to reducing its fee burden and correspondingly increase net returns. The pension fund sees this as a means of building a stronger relationship with managers, only working on deals with existing portfolio GPs.

The aim is to source one Asian co-investment every year, with minimum ticket size of $25 million. In that regard, PGGM is becoming involved earlier in the co-investment process.

"We don't focus on co-investment syndication only," says Meewis. "We can provide additional value in transactions with strong sustainability themes, such as food security and health care. Sustainability has become a stronger focus of the pension funds we manage."

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• LPs
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• PGGM