The private equity arm of the Guardian Life Insurance Company of America, which has been committing to private equity funds since 2006, is preparing to allocate capital to emerging markets funds.
“We’d like to get some exposure to the emerging markets this year. We’ll probably be pulling the trigger in the last half of the year,” says David Turner, head of private equity for Guardian Life.
The private equity arm has a long term target of 2.5 percent of total assets, compared to a current actual allocation of seven-tenths of a percent. Turner declined to confirm the size of Guardian’s assets under management, but sister data provider PrivateEquityConnect.com pegs the figure at more than $28 billion.
Guardian has not decided which country or region it will target first, but, Turner says, “Asia is the largest market, so there are more opportunities there. I can’t predict that will be first, second or third, but we’ll most likely be looking there,” he says.
“The emerging markets are attracting a lot of capital right now,” Turner says. “GDP growth in China and India continues to fuel returns, perhaps maybe better than average in private equity overall. It will take a long time for those markets to overdevelop and play themselves out.”
The emerging markets allocation would form part of the company’s international investments. “Part of our allocation strategy is to create an international overlay across our strategy targets in the portfolio,” Turner says. “Within that overlay, we would create a set-aside for emerging markets, which would be a complement or our international investments.”
Guardian is looking for managers who “are clearly in tune with local economies and local business practices”, Turner says. It will be attracted to countries that have sufficient private equity industries such that “transparency … would be up to what we would consider Western standards”, he says.
The emergence of a new player with ready capital for private equity in the emerging markets space would be a welcome development. Fundraising in the world’s emerging markets dropped 66 percent in 2009 to $22.6 billion, according to research from the Emerging Markets Private Equity Association (EMPEA). But while fundraising took a hit last year, emerging markets saw a relative leap in their share of global deal activity, accounting for 26 percent of the global total in 2009, compared to 14 percent in 2008.
Guardian started private equity investing in general to “build a diversified and balanced portfolio from a strategic, geographic and sector standpoint”, says Turner. The company has to date committed capital to venture and lower mid-market buyouts.
“We’ve avoided the mega-funds and the large mid-market funds because they require returns really dependant on leverage,” he says. “Our focus is to back buyout funds and managers who know what to do with a company and the capability to influence outcomes.”
Guardian also has a special situations bucket that includes structured finance, distressed for control and secondaries strategies among others. Guardian has acquired some assets from the secondaries market “through our network”, Turner says.
The amount of secondaries capital awaiting deployment – estimated to be between $40 billion and $45 billion – has taken the shine off the secondaries market because it will “have an impact on pricing spreads”, Turner says. “From our standpoint, that makes it a little less attractive, you really have to poke in the corners and look under all the rocks to come up with attractive secondaries deals.”
Guardian had sought to reach its 2.5 percent private equity target in five to six years, but that pace will “probably be stretched out” as “we’ve had a fairly quiet, lower level of investment activity over the last 18 to 24 months”, Turner says