Private equity fund of funds (FoF) manager Pantheon has been active in the emerging markets for the past 25 years and in Latam since the 1990s, but historically has only invested on behalf of its segregated account clients in Latam. However, with increasing client interest in Latam and a growing pool of quality managers to invest in, the firm is now focusing  more of its attention on the region.

Maureen Downey, principal at Pantheon was previously sceptical about the region because there was not a broad based appetite from institutional investors to invest in Latam. Furthermore the general partner (GP) landscape was limited in terms of the number of investable managers which had track records across diversified portfolios of companies. Now, the combination of increased client interest in the region and the growth of managers in Latam is inspiring interest from Pantheon.

“Latam has evolved as a region with a stable political environment, favourable regulatory reforms and the creation of institutions to support the growth of business and foster the creation of a private equity ecosystem. These factors have generated substantial positive momentum such that Latam will continue its strong growth trajectory,” says Downey.

At the moment, Downey is more optimistic on Latam than other emerging markets. The key focus for Pantheon is on identifying the best managers in the region, assessing small country-specific funds through to larger pan regional funds. 

 “Brazil is obviously a primary location given the size of its economy but other markets in Latam are also interesting, and we spend considerable time evaluating the relative value of opportunities across the region as a whole,” she adds.

Allocations

Pantheon invests on behalf of more than 300 institutional investors, including public and private pension plans, insurance companies, banks, endowments and foundations. It manages regional primary investments, global secondary and infrastructure investments and customised separate account programmes.

The firm currently allocates to Latam from a pool of capital targeted at the emerging markets and has commitments this year to fund managers in Latam. Downey confirms that the firm’s exposure to emerging markets, and in particular Latam, is likely to increase in the medium and long term and as part of the increased focus on Latam, Pantheon intends to open an office in the region in 2012.

“It is our hope that we will increase our client base in Latam over the next two to four years like we have done in other developing markets very successfully in the past.”

Pantheon is currently in what Downey refers to as the ‘evaluation period’ of making new allocations to Latam, with investments in a couple of mid-market funds focused on single countries as well as a number of pan-regional strategies in the pipeline.

“We’re very excited about the potential in Latam but we assess and compare investment opportunities globally with our other emerging markets colleagues at each office to evaluate the relative value of each opportunity.”

The firm recently announced a global private equity programme established jointly with Germany’s largest pension fund, the $50bn Bayerische Versorgungskammer (BVK), which has already begun to tap opportunities in emerging markets, with specific interests in Latam as part of the mandate.

The programme, which will be managed by Pantheon, represents a separate account investing pro-rata by strategy alongside Pantheon’s FoF programmes.  BVK’s separate account will invest in primary buyout, growth equity and venture capital funds in mature markets in North America, Europe and Australia and growth markets in Asia, Latam and Africa. It will also invest in co-investment and secondary opportunities globally.

Private equity potential

 According to Downey, the Latam GP landscape is still nascent although private equity has existed in Latam since the late 1980s in select countries. However, the sector has been expanding with new GPs forming to take advantage of the attractive economic environment in Latam.

“Everyone focuses on Brazil, and rightly so because it’s the biggest market, but there are opportunities in other Latin American countries – Colombia, Peru, Mexico, Chile and even Argentina,” says Downey.

Downey believes the mid-market is where the biggest opportunities for investment lie particularly with sectors focused around domestic growth in a good position because they’re serving the whole share of growth in the economy.

 “There are deals at the larger end of the market that will be attractive but it’s a much more competitive market relative to the mid-market space.  It will also be interesting to follow if and how larger managers use leverage in their portfolios.”

Downey highlights the later stages of the growth equity market as also being a potentially interesting space. “I believe you’ll see some interesting opportunities evolving in this sector because there is a culture of entrepreneurs that are investing in Brazil already.” 

Local general partners

Pantheon employs a top-down as well as a bottom-up strategy when searching for potential fund managers to partner with. The firm develops a macroeconomic view of the drivers of the global economy over a three to five year period and tilts its investment strategies to capitalise on those sectors and geographies that offer the best relative value, targeting managers who can best capitalise on those opportunities.

According to Maureen Downey, the firm spends a significant amount of time getting to know and understanding the landscape and sectors potential fund managers are operating in, focused on the question: “Do they have the ability to develop and adapt within their firm and the operational capability that’s going to be able to match deal flow and capitalise on the opportunities that may arise in the next five years?”

“The key to our process is that we do in-depth studies of the manager landscape in each region and try to understand in detail how managers createvalue over time in their portfolio companies – it is a data driven process but it also includes a great deal of referencing to understand a manager’s reputation and how they conduct their business to ensure continuity throughout the fund’s life,” says Downey.