Steve Cowan, Managing Director of PCGI, talks about his experience investing in emerging markets.

LAVCA: Please give some background on your fund of funds. What are your assets under management? What is your diversification strategy, by asset class and geography?

Cowan: PCGI is a Washington, DC, based investment manager focused on partnership and co-investment in select private equity markets outside of the United States. With more than USD1 billion under management, PCGI has almost 100 years of collective experience investing in international private equity markets. Geographically, our current portfolio is broadly diversified as set forth in this chart:

LAVCA: Roughly what percentage of your portfolio do you generally allocate to emerging markets private equity? To Latin America? Will this change going forward?

Cowan: While the vast majority of our focus is on investing in emerging private equity markets, we define our investment approach less by geography than by opportunity. Wherever we invest, we seek to work with general partners whom we believe present the opportunity to generate outsized returns and enjoy notable market inefficiencies. To date, this has resulted in approximately one quarter of our portfolio being invested in Latin America. We do not anticipate wide variations from this level in the medium term.

LAVCA: What geographies or countries are of particular interest to you right now? What about in Latin America specifically?

Cowan: We spend a great deal of time focused on analyzing macro-economic environments and the issues related to investing in any given geography. Ultimately, however, since we act primarily as a limited partner, we spend the overwhelming majority of our time focused on understanding the abilities and experience of specific GPs.

So, while we continue to have significant interest and excitement concerning the opportunities represented in some parts of the world, we are more focused on general partners and their ability to generate returns than we are on the promising nature of a given country or region. Within, Latin America our focus has primarily been on Brazil, Chile and Mexico.

LAVCA: What would be a typical size of a commitment that you make to a fund?

Cowan: We do not have a typical size. We prefer to avoid devoting resources to commitments smaller than USD10 million and there will be few instances where we will commit more than USD75 million.

LAVCA: What are the key characteristics of the best emerging markets fund managers?

Cowan: The primary characteristic of a good manager is the ability to consistently generate exceptional cash-on-cash returns. In addition, we value transparency, good communication, robust systems and process, integrity, alignment of interest, a commitment to fairness and a willingness to work with LPs as issues arise. In addition, we are particularly interested in participating in interesting co-investment opportunities and value fund managers who have and will share such opportunities.

LAVCA: How do you go about finding and selecting the best fund managers?

Cowan: Our process for identifying and selecting managers is complex and very research intensive. First, our team of investment professionals has more than 100 years of collective experience working in international markets with most of that experience working in private equity. As a result, we have a very good understanding of the markets and of the most compelling private equity professionals in each of them.

Layered onto this extensive network of relationships and experience, we conduct regular and comprehensive “market-mapping” of every market on which we focus. Through this process, we seek to maintain a comprehensive view of each of the firms and to stay in touch with a significant segment of this universe through a multi-tiered system of forward calendars. Our investment process then consists of a “heads-up memo” which is followed by extensive diligence. This latter process will include extensive meetings with all levels of the investment team and back-office as well as visits to portfolio companies and hundreds of hours of analytical work on the firm’s portfolio and in referencing the firm and its professionals.

In the markets where we are focused, fund managers’ portfolios often contain significant unrealized value and assessing this value requires devoting extensive resources. This element of the process, while time-consuming, is an essential component in differentiating managers from one another. Ultimately, this work is presented to our investment committee for an investment decision.

LAVCA: Do you invest in any secondary opportunities? Under what circumstances?

Cowan: Yes, we do. We look actively for secondary opportunities. As with any investment, we are seeking a market inefficiency that provides us with an opportunity to earn a significant return. The circumstances might include issues such as the liquidity challenges many LPs faced in the global financial crisis. More generally, however, there will always be situations where investors will seek to gain liquidity as private equity is, by its nature, a long-term asset class. In such situations, we are willing to spend the time and analytical resources to assess such opportunities where there appears to be significant imbedded value.