ASSET CLASS

Banco Bilbao Vizcaya Argentaria, known as Grupo BBVA, is the second-largest bank in Spain and 15th-largest financial institution in the western world. Jose Luis Segimon is tasked with investing the private equity allocation of the institution's €16 billion pool of pension money. Segimon's 13-year career at the bank includes spells in investment banking, asset management and even online banking. While private equity is now his main responsibility, he is also on hand to aid fellow managers on other illiquid assets.

In his current role as private equity investment manager for BBVA, Segimon handles the private equity element of a pool of capital that includes the BBVA pension fund, around 70 other corporate pension funds and a pool of individual retail pension plans. In total BBVA has around €16 billion of pension money under management.

Strategists at the bank have earmarked 10 percent of the capital pool for alternative investment, which in turn is split equally between real estate, hedge funds and private equity. But while 3.3 percent, which would work out at around €533 million, is the target for private equity allocation, the reality of mobilising such a disparate group of funds towards an asset class that is relatively new to Spanish investors is not easy.

Each fund has a different risk profile and appetite for private equity. Some will have a discretionary mandate built in to the asset allocation, while some will be allocated within a framework. “When it comes to implementation of this strategy for each individual pension fund or portfolio, it is very difficult. Some of them are moving their allocations forward faster, while others take much more time. Some will disagree with the strategic allocation and are not ready to open the alternative investment gates yet,”says Segimon.

BBVA's private equity programme is essentially a fund of funds managed by Segimon, into which the bank's pension clients are channelled. Often other institutional clients of the bank, such as insurance companies and smaller asset management companies, will invest alongside BBVA Fondo de Empleo in order to take advantage of its volume in accessing big-ticket funds. Segimon will also act as an adviser and gatekeeper to any of the bank's clients seeking to make ad hoc private equity investments.

REGULATORY CONSTRAINTS
Spanish institutions have only lately begun investing in private equity in earnest, due more than anything to regulatory constraints. Until 2007 the law restricted both the amount and type of private equity assets that could be held in a pension fund portfolio. Now, however, the restrictions have mostly been removed. Insurance companies were also subject to laws preventing private equity exposure. As of July last year these too have been changed.

Segimon points to Telefonica's €3.9 billion employee pension fund, Fonditel, as being one of the pioneers of Spanish institutional investment in private equity. “They have done an excellent job,”he says of the team led by chief executive Luis Peña.

The geographical breakdown of Segimon's fund mix reveals a strong appetite for domestically focused vehicles. This is not, explains Segimon, a result of either regulatory constraints or sentimentality. Quality of manager is his foremost concern, but he also like the immediacy of being invested in local businesses. Being invested in Spanish funds and Spanish businesses “makes it a little easier to explain [to his pension clients] how the managers are improving the companies, “he says.

A heavy Spanish exposure could be cause for concern, given that the domestic economy – as highlighted by the International Monetary Fund in October – is likely suffer badly in the ensuing recession. An embryonic fund like Segimon's, however, is arguably more likely to benefit from low prices than feel the pressure of recession. He is positive about the progress the domestic private equity market is making in light of tough conditions. “The Spanish private equity market has done very well. Volumes in the first half of 2008 are actually up on 2007 in terms of investments,”he says.

“Spain is far from immune from the world's problems,”he concedes, adding that, “funds in the divestment phase are finding it difficult.” Fortunately for Segimon, he has only recently – during summer this year – made the final allocation from BBVA's 2007 programme.

SECONDARY CONSIDERATION
Both emerging markets and the US are conspicuous in their absence from the programme's geographical mix, but Segimon does not rule out investment in these geographies in future programmes.

Would Segimon change the mix if he were reallocating his funds today? “In terms of strategy, not really,”he says. “Maybe there would be some difference in percentages, but the mix of buyout, growth capital and mezzanine would remain. It would likely, however, also include exposure to secondary funds.”

Geographically Segimon would be inclined to up his exposure to the US and Asia, although he takes care to point out that through its investments in European funds, his portfolio is exposed to global markets via individual portfolio companies operating multi-nationally.

Segimon's appreciation of private equity goes beyond the returns it might generate for BBVA employees' pension pot. He takes great pains to point out that new research from ASCRI, Spain's private equity industry body, shows that Spanish companies grow more than twice as fast – in terms of both employee numbers and sales figures – when they are under private equity ownership.

He claims that private equity is more transparent than other forms of ownership. “When someone buys a company and in the first board meeting says ‘we are here, we are onboard, we have bought 52 percent of the company and our intention is to sell the company in five years time, so let's get to work so we can see how we can improve it,’ there is nothing to hide.”

NO DRIFTING
What does Segimon say to the suggestion that domestic Spanish private equity firms, which account for 32 percent of his portfolio, are susceptible to volatility? “Those managers who stick to what they know, deliver stable returns. When managers mix up their activity and invest in sectors they do not really understand, such as dotcom or technology, there you find volatility,”he answers.

Segimon's desire for managers to “stick to what they know”extends to all his GPs. He is not, however, unduly worried about strategy drift. “In the funds we have invested, we know they are going to stick to what they told us. We keep asking the appropriate questions.” In today's climate, one would hope so.