New York State Common Retirement Fund’s chief investment officer Vicki Fuller made headlines last year when she announced the $180 billion pension plan’s intention to invest up to 3 percent of its assets – or around $5 billion – in Africa in the next five years, one of the first US public pension funds to make such a commitment to the region.
NYSCRF’s $14 billion private equity programme, the majority of which is invested in the US and Europe with around a 10 percent allocation to Asia, made two commitments to sub-Saharan Africa in 2015 – $100 million to Helios Investments III and $85 million to ACA’s fourth fund, which is in market targeting $600 million, both new relationships for the fund.
Brian Hughes, who heads the private equity programme at NYSCRF, tells Private Equity International how emerging markets fit into the fund’s portfolio and how his team assesses the opportunity set in Africa.
Q. What’s behind the move to increase emerging markets exposure?
A. The job of private equity is to add incremental return to the portfolio in a world of very low yields and low returns. We are looking globally to enhance that return. We have an actuarial target of 7 percent a year; that’s pretty difficult to do these days, and private equity helps achieve that target.
Q. How do you assess the quality of funds and managers?
A. Private equity, I believe, is all about the quality of the management team, and I think it’s fair to say that although some of our diligence was focused on the opportunity in Africa, and sub-Saharan Africa in particular, the quality of the management team was paramount.
In the case of ACA and Helios, we believed the management team was of great quality. For instance the Helios team had prior experience at TPG, we are also an investor with TPG on a global basis, so certainly that gave us some confidence.
Because the fund is a sole trusteeship, we always have a third-party consultant involved in reviewing all of our investments, and we received recommendations from our consultant for both of those investments.
Q. How do you weigh up the complex macro story in Africa with the fund managers themselves?
A. We certainly understand the risks of investing in sub-Saharan Africa and we follow the developments there and on the continent in general relatively closely. It’s a very large market. Although we’re conscious of the risk, we think there’s a substantial opportunity there.
In general in emerging markets the calculation that is driving the interest is the development of the consumer society, the development of the middle class, and we think that will drive the economy in future years as it does in the US currently.
Q. Are you looking for a risk premium from Africa funds?
A. We do expect a risk premium. I don’t know that we’ve identified a particular premium, but we understand that we’re taking more risk than we would be in the US, [so] we do expect a stronger return than you would from a typical US private equity fund.
I would certainly argue in developed markets, for instance Europe, China, developed Asia generally, our experience has been there’s less of a risk premium, so you’re going to emerging markets in search of that premium. And it’s a small enough piece of a diversified portfolio that we can tolerate the risk. For instance, the year that we committed to Helios and to ACA, yes, it totalled $185 million commitment, but you have to put that into the context of the $5 billion that we committed during 2015 in the private equity programme.
Q. Do global headwinds across all markets make investors more or less keen on emerging markets?
A. It does point to the value of diversification, and actually it points to the value of the structure of private equity because you’re making a commitment to the best managers you can find, and over the course of the next five years, that manager is going to invest that capital. The great thing about that structure is you do not have to put out capital.
For instance, in Europe I’m very conscious of the fact that investment activity has slowed down, our managers are watching to see what happens as a result of Brexit. I understand the process of actually exercising Brexit is going to be a long one, so I don’t know that they can wait it out, but certainly they can wait through any temporary instability in the market to see how things do shake out.
I think the approach can be the same in emerging markets. It can see you through short periods of volatility until you can come out of the other side of that and at least have a more stable environment to invest in.
The great thing about the private equity structure is that you do not have to put out all of the capital at once.
Q. Is your preference for pan-Africa funds or more geographically concentrated vehicles?
A. We’ve historically done both more localised funds, country funds, as well as regional and pan-regional funds. We think both have a place in the portfolio. Our chief investment officer certainly believes in the value of local teams, the depth of knowledge that they have in their markets, but I also recognise that if you have a pan-regional fund, for instance, they may be able to focus their investment activity on a more favourable market within their purview. There’s value in both approaches.
Q. Do you see NYSCRF making more commitments to Africa?
A. There is room to invest further there. We’ll probably look more to smaller segments of the market. We may need the help of a fund of funds or a separately managed account.
The problem that we have is with a very small staff and a lot of capital that we need to invest each year, we have to make sizeable commitments, and in emerging markets generally there are a lot of funds that are just too small for us to target directly. So we will really need the help eventually in these markets of a manager of some kind, whether we organise that as a ‘fund of one’ or another separately managed account. That’s probably the way we will approach the African market going forward.