LPs on emerging markets: Ride out volatility and ‘get compensated over time’

Investors in emerging markets should be 'in it for the long haul' and make sure to back a variety of GPs, according to panellists at an EMPEA and IFC conference.

Currency and political risk in developing economies are worth the challenge and present considerable investment opportunities, according to several investors at the Global Private Equity Conference hosted by the International Finance Corporation and EMPEA on Wednesday.

IFC EMPEA Global Private Equity Conference“What we are trying to do is build a global portfolio with diversified exposures – and we’re planning to be there for the long haul – so we will ride that volatility over the long term,” said Pierre Barber, a portfolio manager at The Canadian Medical Protective Association, which manages $5 billion across private equity, real assets and credit.

Barber believes there are better growth opportunities in emerging markets and that LPs that get a good mix of managers across geographies and sectors “will be compensated over time”.

Barber noted the main challenge is underwriting the large range of outcomes and presenting the investment thesis to the investment committee, essentially arguing that “the future may be different than the past with respect to risks”.

The CMPA, a not-for-profit association that protects Canadian physicians against malpractice suits and promotes safe medical care in the country, has investments in Latin America and Asia. It is also looking to add exposure to Eastern Europe and Turkey, Barber said.

For Japan Post Bank, investing in emerging markets means reaping better returns over time, said head of private equity investments Hideya Sadanaga.

“We are investing not just in developed markets but also emerging markets not just for the sake of diversifying, but because we think we can get very good returns from those markets,” Sadanaga said during the panel. “And what underpins that thinking is we need to get our money back. It is very important that we are comfortable that we can get good returns from wherever we are investing.”

Japan Post Bank, with ¥220 trillion ($2 trillion; €1.7 trillion) in assets under management, has invested in China and India via fund of funds managers over the last five years and has seen a “good flow of exits coming out of China”, Sadanaga said.

The investor hopes to reach ¥10 trillion of alternative assets under management by 2026, according to its latest medium-term management plan, published last week. So far it has reached ¥4.2 trillion of the ¥8.5 trillion three-year alternatives target it set in 2018, of which ¥2.2 trillion is held in private equity and ¥1.5 trillion in real estate.

For Angela Miller-May, CIO of the $12.2 billion Chicago Teachers’ Pension Fund, being part of Africa’s growth story was one of the main drivers behind making the pension’s first direct primary commitments in the continent in 2019.

“We kept educating ourselves, educating our board and we scaled allocation amounts to a total of $20 million that will give us exposure across Africa,” Miller-May said.

She noted that doing due diligence on Africa-focused managers is no different than other markets, in which the investor looks at “the stability of the firms, the quality and experience and depth of teams, the investment philosophy, the risk management process, and track record of deals and exits”. Chicago Teachers also had to do a deep dive into country risk and sector risk, she said.

Chicago Teachers plans to diversify its portfolio across geography and industries and will consider more opportunities in Africa and other emerging markets by next year, Miller-May told Private Equity International in an interview this month.