LAVCA caught up with Claudio Demontis, Vice President of ATP PEP, the internal fund-of-funds of ATP (one of the largest pension funds in Europe) to hear about their exposure to LatAm since making an initial commitment to the region in 2010.

LAVCA: Please give some background on ATP PEP. What is your exposure in terms of geography, sector, and stage? What percentage of your portfolio do you allocate to emerging markets and Latin America specifically?

Demontis: ATP PEP is the internal fund-of-funds of Danish Pension fund ATP. With US$100b of assets under management ATP is one of the largest pension funds in Europe. We (ATP PEP) raise closed end funds with capital only from ATP, with a strategy of investing in buyout, growth, and VC across Europe, the US, and select emerging markets. Since 2001 when ATP PEP was established, we have committed approximately US$10b to private equity. Within our closed end funds we can commit up to 10% to emerging markets. We do not have a specific target allocation for LatAm within that 10%, but we clearly seek exposure to the region.

LAVCA: How long have you been investing in Latin America? What initially attracted you to the region?

Demontis: We started screening more selectively in emerging markets back in 2005-2006 and made our first investment outside our core markets in 2007. In 2010 we made our first commitment to a Latin American manager after we had been looking actively in the region since 2008.

Overall we liked the increasing middle class, and the increased consumer spending associated with that, as well as higher growth rates than what we had seen in Europe and the US. We were also intrigued by the relative political stability several of the Latin American countries had seen over the past 10 years.

At the same time, we were attracted from a bottom-up perspective as we saw several experienced private equity managers with good track records who had been through various cycles in the region.

LAVCA: In your experience, how does Latin America compare to other emerging markets?

Demontis: We like a number of emerging markets and in general find the opportunity set and the growth rates attractive. We continue to view LatAm as an attractive market from a risk return profile. Overall growth has slowed but we see plenty of opportunities from the large consumer group that exists in the region, and several sectors continue to show strong underlying growth. As mentioned, we see lower political risk in some of the LatAm markets compared to some of their Asian peers and the quality of managers is generally high.

We like the fact that several of the LatAm groups are capable of making majority investments, and in this way can drive growth through operational enhancements by assisting their portfolio companies’ management teams. We also see a large number of family owned businesses looking for capital to grow or sometimes they are in need of a transition, as attractive ways to find interesting opportunities. We also like the fact that leverage is available in some of the LatAm countries to enhance returns.

LAVCA: Tell us about your current commitments in Latin America. What is your typical commitment size? What has been your experience with the managers you have committed to?

Demontis: So far we have committed to a number of pan regional firms which covers a large part of the region and diversifies throughout individual countries, sectors, company size, as well as investment years. We have not invested specifically in country focused funds as we initially wanted to avoid the risk of “being trapped” in one market if the economy suddenly turns or the political situation changes dramatically.

Our target allocation to funds in Europe and the US is US$50m. In newer markets such as Latin America we will look to invest around half of that.

We have been happy with all our managers so far. It has been a tough environment in some of the countries as prices have increased in some markets whereas others have seen growth rates drop. This is also why we entered the region via regional funds. Our managers have stayed disciplined and focused. However, our Latin American portfolio it is still young with somewhat limited visibility and few realizations.

LAVCA: Can you elaborate on your views regarding exposure to global funds, versus regional or country-specific funds?

Demontis: As mentioned we like the regional groups in LatAm as they will give us access to several of the attractive countries in the region if they see the right opportunities. At the same time they have the opportunity to cherry pick between countries throughout the investment period of the fund and choose the most attractive investments in the most attractive markets. Moreover, they have the ability to opt out of a specific country if the environment is not right at a point in time. Some of the countries in the region are relatively small from a private equity perspective and in this way we see an opportunity of getting exposure without adding significant risk. Also, by entering in this way initially we see the risk of a manger investing in a potentially overpriced environment as lower. Having said that, we like country specific funds as well and believe that being local will result in interesting deal flow.

LAVCA: Which LatAm countries are of most interest and why?

We view several of the underlying countries in LatAm as interesting from an investment perspective but for different reasons. Right now, and for some time, Peru and Colombia have been among the high growth countries in the region and we want exposure to these countries because of that. However, pricing is also at high levels and competition has increased significantly over the past several years. On the other hand, in countries like Brazil where the growth rates have decreased we have seen prices come down which has opened up attractive opportunities. Mexico is another market where we see interesting opportunities given the countries size and affiliation with the US.

LAVCA: What is your appetite for investing in first-time funds? Do you have any restrictions/mandates?

We do not have any restrictions in relation to investing in first time funds, and if we find a manager with the right strategy and team in place coupled with some interesting prior investments we will engage. We are however, conservative investors and the bar is especially high for first time groups.

LAVCA: What is your mid- to long-term strategy for investing in LatAm?

With our current commitments we believe we have created an initial strong footprint in the region for ATP PEP and have been able to do so in a diversified way. This also means that we now are comfortable adding country specific funds which we expect to do in the mid-to long term.

LAVCA: What are the most important factors you consider/characteristics you look for when selecting fund managers and what advice would you give to managers looking to work with ATP PEP?

Generally we look for managers with experience within the strategy they want to follow for the fund they wish to raise. We look for teams that have worked together for a number of years and know each other well in order to mitigate the risk of a break up. We also need to see some successful prior investments, and if there are no historical exits then we should be able to see significant value creation in the underlying companies. We look for a balanced set of terms where both parties are aligned and can work as partners for the years to come.

If you want to work with ATP PEP just reach out. ATP PEP is an open group and we will generally take a meeting with most managers that fit the criteria mentioned above. We like meeting GP´s outside their fundraising process in order to get to know each other better before the launch.