LAVCA recently spoke with Rafael Ramirez, Portfolio Manager– Private Equity & Special Opportunities at the Alaska Permanent Fund Corporation, a sovereign wealth fund originally seeded by state oil & gas revenues with a globally diversified US$63b multi-asset class and multi-strategy portfolio.

With a track record of committing to Latin American funds over the last decade, Rafael discusses how the COVID-19 pandemic has led to opportunities for remote due diligence and the strategies that are most attractive in the region in the short- and long-term.

LAVCA: Please provide some background on the Alaska Permanent Fund Corporation. 

Rafael Ramirez: The Alaska Permanent Fund Corporation (“APFC” or the “Fund”) is a sovereign wealth fund originally seeded by state oil & gas revenues over four decades ago with a mandate to invest on behalf of current and future generations of Alaskans. Today, the Fund has evolved into a globally diversified US$63 billion multi-asset class and multi-strategy portfolio. Alternative assets account for approximately 35% of the Fund which encapsulates private equity, special opportunities, absolute return, real estate and infrastructure. We’re underweight emerging markets and Latin America with only 50 basis points of the Fund being exposed to the region. However, we have opportunistically been adding to the region in recent years and expect our exposure to marginally increase as our capital is called.

…we have opportunistically been adding to Latin American [allocations] in recent years and expect our exposure to marginally increase as our capital is called.

LAVCA: Given the current global market volatility caused by/as a consequence of COVID-19, how do you view PE/VC in emerging markets and Latin America specifically in a global context? 

Rafael Ramirez: While we believe that COVID-19 will inevitably lead to some near-term macroeconomic headwinds and currency volatility across emerging markets and Latin America, we believe our thesis to remain exposed to these markets remains intact. We are monitoring the situation closely like everyone else, but still find demographics and increased domestic consumption to be an attractive theme. Further, our permanent capital base and limited annual liabilities allows us the luxury of being able to withstand short-term volatility with our focus on the long-term instead. We also think trying to time the market is a risky proposition and for that reason it’s still business as usual at APFC. We’ll be maintaining our pace and will opportunistically play offense during periods of dislocation.

LAVCA: Given today’s market volatility, do you anticipate that emerging markets have an advantage/disadvantage compared to developed markets? 

Rafael Ramirez: Do we think that emerging markets are better positioned to respond to the crisis from a monetary standpoint? The simple answer is no. The Fed has one of the most expansive toolkits in the world and has done an extraordinary job in swiftly rolling out quantitative easing programs to prop up capital markets. However, it’s been surprising to see governments in Latin America also move quickly in helping slow the spread and getting cash in the hands of consumers. We’ll be closely monitoring how fiscal stimulus programs and increasing budget deficits will impact interest rates and inflation throughout the region. Either way, we believe the-risk off and flight to quality trade will lead to some good buying opportunities for those with dry powder.

LAVCA: In a time of mass global quarantine and social distancing, how are you finding ways to interact with your fund managers? 

Rafael Ramirez: It feels like the PE industry hasn’t really missed a beat in this new environment. Similar to many of our managers, we were able to execute a seamless transition to a remote work setting in mid-March after having aggressively invested in IT over the last few years. That said, the level of proactive outreach from our partners during these uncertain times has been nothing short of extraordinary, and as a result, we feel we’ve gotten a solid grasp on the COVID-19 impact to our portfolio. We definitely have a long way to go before things get back to normal, but we think that there could be some positive elements that are here to stay such as remote work flexibility and perhaps even more stringent underwriting.

LAVCA: What is the most helpful thing a fund manager has done since the pandemic started sweeping the globe earlier this year?

Rafael Ramirez: It’s difficult to isolate to one specific occurrence. However, we believe the fact that our portfolio is diversified by vintage, strategy, and geography helps give us an informational advantage on top of serving as a powerful risk management tool. For example, we were able to leverage the global platforms of some of our key relationships that have a presence in Asia and Europe by receiving valuable insights and near real-time information regarding the pandemic and its early effects on regional economies. This has informed our thinking and has allowed us to not only ask the right questions as it pertains with other investments in our portfolio, but also helped us understand the denominator effect with our Fund, pacing assumptions, and our long-term asset allocation targets.

LAVCA: Are you looking to increase, decrease, or maintain your investments to Latin American funds? What is the typical size of commitment you make to a fund? 

Rafael Ramirez: We have gradually made numerous commitments to a mix of pan-regional and country specific funds after having actively covered Latin America for nearly a decade. We’re also excited that we closed on our first co-investment in the region last summer after having gotten close on several occasions in years prior. When you add all this together, we’ve made approximately US$180 million in commitments to the region.

As it pertains to our ticket sizes, our sweet spot is usually US$50-75 million for primaries, co-investments, and direct investments – but of course we’re able to flex up or down accordingly depending on portfolio fit and other dynamics. Looking forward, we expect to prudently diversify away from developed markets with emerging markets and Latin America being suitable options.

Looking forward, we expect to prudently diversify away from developed markets with emerging markets and Latin America being suitable options.

LAVCA: Are you currently doing any virtual due diligence of funds?

Rafael Ramirez: Yes – we completed our first virtual onsite post-COVID last month and are in the process of wrapping up our investment and legal due diligence for that specific opportunity. Fortunately, this was a group we had previously engaged in-person with and developed strong rapport over time. We are strong proponents of using the latest technology and feel that we have adapted well in this environment. While we would prefer to have in-person meetings with existing and prospective fund managers, we are confident that we have the right tools in place to properly carry out our investment process on a virtual basis.

We completed our first virtual onsite post-COVID last month and are in the process of wrapping up our investment and legal due diligence for that specific opportunity… we are confident that we have the right tools in place to properly carry out our investment process on a virtual basis.

LAVCA: What challenges and opportunities do you see in Latin America, given the current local market environment? What strategies do you find the most attractive in the region right now?

Rafael Ramirez: The U.S. was several months behind Asia and it appears that LatAm just recently started to feel the brunt of the outbreak in mid-May. As a result, short-term economic activity will undoubtedly be challenged due to strict lockdown protocols throughout the region which have triggered adverse supply and demand shocks. However, we believe that the region is overall better positioned to manage the crisis today than even several years ago due to deleveraging. Then there’s the case to be made that the region’s younger demographic could perhaps better withstand the virus. Overall, we continue to like Brazil and the Andean region due to their strong fundamentals and pro-business environment. Within private equity, we like growth buyout strategies targeting consumer-driven themes mostly in recession resilient industries.

Overall, we continue to like Brazil and the Andean region due to their strong fundamentals and pro-business environment.

LAVCA: Where does venture capital fit in your investment strategy? What stage opportunities do you seek and how do you identify them?

Rafael Ramirez: We have been actively investing in venture since 2005 and have invested across the spectrum from early-stage to late-stage / expansion. Most of our historical investment activity has come from making commitments to closed end funds although we have also invested directly in early funding rounds on several occasions. Today, venture represents approximately one-third of the private equity & special opportunities portfolio – of which only 9% is invested in emerging markets. We currently don’t have any venture exposure to Latin America due to the nascent stage of the industry although it is an ecosystem that we continue to monitor.

LAVCA: What do you look for and value in a fund manager? Can you explain your due diligence and selection process? Has anything changed in your analysis given the current environment? 

Rafael Ramirez: Aside from seeking out cohesive teams with a proven and repeatable investment strategy capable of producing strong risk-adjusted net returns, we aim to back managers that are additive to our portfolio and view us as a strategic partner rather than just a source of capital. Our investment process begins with continuous market mapping, typically engaging with groups outside of a formal fundraising process with the goal of establishing deep relationships before making a commitment. The bar for adding new managers remains high, and even more so in Latin America – yet we continue to proactively cover the region.

LAVCA: Have you or would you consider investing in a first-time GP?

Rafael Ramirez: We have partnered with several renowned institutional investors through a JV that established Capital Constellation, a platform designed to seed and invest in minority stakes of next-generation managers.

LAVCA: What role do ESG and responsible investment practices play in your investment strategy and, ultimately, in the selection of fund managers? Do you have any criteria related to gender diversity when considering a fund manager or targets to increase allocation to female fund managers?

Rafael Ramirez: While we do not have a formal ESG policy internally, we do believe the broader private equity industry continues to take a keen interest in the matter and is rapidly moving in this direction. The strong push from many forward-leaning LPs in Europe has also helped fuel the conversation amongst capital allocators in the U.S.

Going forward, we would expect that more and more LPs will require their GPs to adopt policies based on the UN Principles for Responsible Investment or other similar frameworks which we believe should contribute to enhanced long-term returns.