A LatAm Feeder frenzy

When Pantheon closed its recent Asia fund, it revealed that it had been able to attract LP commitments from pension funds in Chile and Peru. That’s an achievement worth boasting about – because despite all the hype about the region’s potential as a source of capital, relatively few Western firms have managed to pull it off.

The opportunity in Latin America is not in doubt. Most of these countries mandate contributions to one of a small number of pension funds, so they’ve developed some sizeable pools of capital. These two countries alone have about $200 billion of pension fund assets under management, and as their populations get richer and pay in more, some estimate they could double this figure in the next five years or so. Assuming they eventually put 5 percent to 10 percent of this into alternatives, that could amount to a tidy sum.

However, for foreign firms wanting to get their hands on this capital, the practical difficulties are manifold – and differ from country to country.

In Chile, for example, all of the pensions have to invest in private equity via feeder funds. That’s complicated enough, since it requires firms to hire local lawyers and administrators in order to get the paperwork right. But the bigger issue is that none of the pensions can account for more than 33 percent of any feeder fund, so a GP needs at least three to sign up. Since there are only four or five big funds, that doesn’t leave much margin for error.

In Peru, the challenge is regulation. Foreign GPs need a special license to market to domestic investors, and in Peru, where this decision is literally subject to the whims of a particular individual, this has proven very difficult to obtain. The regulator also bans funds from doing certain things altogether, like using leverage at the fund level or employing hedging strategies. (There’s talk of changing some of these rules; but if anything, that uncertainty gives investors another reason to steer clear.)

Fees can be an issue throughout the region, as can politics; if the pension funds are subject to some kind of state control, there’s likely to be greater pressure on them to invest domestically (although in somewhere like Chile, the pensions are now too big to invest all their money at home).

So how do you navigate these obstacles? “It wasn’t easy,” says Maureen Downey, a principal at Pantheon. “It took a lot of dedication, a lot of work, and a lot of relationship building”. The firm has spent a lot of time in the region, both educating the pensions about the benefits of the asset class, and also trying to understand their portfolio needs, she adds.

For instance, because the biggest GPs are the only ones with the resources to fundraise here, some of these pensions are heavily weighted towards large buyouts. Pantheon declined to talk about the specific details of its offering, but the fact that it could customise its feeder fund to incorporate some exposure to the European mid-market and also Asia (through the firm’s various funds of funds) must have been a big help.

In time, this process will get easier, as these LPs get more used to the asset class. But in the meantime, hard work and patience is clearly the best strategy…