LP Profile: AIMCo Shifts Gears Toward Directs, Co-investments

Leo de Bever, CEO of the Alberta Investment Management Co., hates paying fees. To avoid the dreaded charges, he is in the process of revamping the management company’s private equity program to concentrate on direct investments and co-investments, while moving away from fund commitments.

After taking up the reins at the C$39 billion (US$35.3 billion) AIMCo one year ago, the first problem de Bever encountered was that some 70 percent of a total budget of about $250 million went to pay firms that managed only 25 percent of AIMCo’s assets. He was especially put off by private equity fees. With private equity, “I am supposed to do better than what AIMCo could earn in listed markets, but…I am paying 2 percent of assets in fees no matter what the return,” De Bever said.

To escape the clutches of the deeply entrenched ‘2 and 20’ private equity fee model, de Bever intends to turn the portfolio on its head. Currently, 70 percent of the value of the C$1.4 billion private equity portfolio belongs to funds, the balance to direct investments. de Bever plans on reversing those numbers over time by moving away from fund investing and concentrating on direct and co-investing. Although some buyout shops do charge fees on co-investments, de Bever said that, provided the firm is pulling its weight in terms of performing due diligence on an opportunity, AIMCo has no plans to pay management fees or carried interest.

AIMCo is not alone in its affinity for direct and co-investing among Canada investors. De Bever explained that many U.S. pension boards feel uncomfortable engaging in co-investments themselves because they feel they don’t have the expertise needed to judge the quality of an opportunity, so they simply farm it out to a fund manager. By contrast, a lot of the boards that de Bever has worked with throughout Canada have a good amount of internal expertise.

When AIMCo was created in 2007, its private equity portfolio came with legacy investments that were heavy on mega-fund commitments and light on the direct and co-investments that de Bever prefers. The stable of managers he inherited contains very well-known names, such as The Blackstone Group and The Carlyle Group; it’s a portfolio that de Bever describes as “respectable, but not particularly spectacular.”

To start taking the portfolio in a new direction, AIMCo plans to commit C$1 billion (US$930 million) to the asset class over the next 12 months, with as much as three-quarters or more going to direct and co-investments. “That’s not a fixed number,” said de Bever of the potential outlay. “If, all of a sudden, we are confronted with wonderful opportunities, it might be more, but realistically, given how slow things are moving, I’m not sure that’s achievable. But that’s the ballpark.”

De Bever said that the denominator effect, which has pushed so many LPs to the sidelines, shouldn’t be an obstacle to reaching that goal. AIMCo has broad allocations to listed equity (55 percent), fixed income (25 percent) and inflation sensitive investments (18 percent), with private equity substituted for listed equity “as we find good opportunities,” said de Bever.

Co-investments

AIMCo’s new direct and co-investment private equity program began more than three months ago, and the staff has been entertaining a stream of opportunities, said de Bever. The staff is especially interested in going-private transactions. It is already considering a couple in Canada and one in the United States.

AIMCo is not particularly fussy about what sectors it invests in. De Bever suspects that many opportunities will arise in industries that are ripe for consolidation because they contain many small companies that could be combined into larger, more efficient businesses. Figure on the size of co-investments that AIMCo makes to range from C$20 million to C$100 million, although there could be situations in which the firm might go a lot higher. But first a manager would have to convince de Bever that it is truly offering something that he couldn’t do in-house. And if so, then he would need to determine “how extraordinary that opportunity is and what we are willing to live with to access it.”

At the moment AIMCo is exploring opportunities in natural resources, manufacturing and technology, but, said de Bever, “we don’t fall in love with the asset; we fall in love with the opportunity.” As to how many co-investments the firm might make over the next year, de Bever thinks there might be a good number of opportunities coming down the pike fairly soon, but it all depends on the health of the economy.

Handling the direct and co-investments are half a dozen portfolio managers based in Toronto, where they search for deals in Canada, the United States and Europe. In deciding whether to invest directly in a company, or alongside a buyout shop, the staff considers how much expertise it has. If company operates in a specialized industry where de Bever feels his group is not active enough to justify building internal expertise, then he would prefer relying on external managers to source the deals.

In looking at potential managers with whom he might co-invest, de Bever does a deep due diligence on how these people invest, what the team is like, and what kind of internal controls they have. Once he feels comfortable with a group, “we don’t sit on them,” de Bever said. “We let them act on our behalf rather than second-guess every decision they make.” And it doesn’t take long for de Bever to make a decision about an investment partner—perhaps a few weeks or a month. “People in the pension industry have this reputation of thinking about this stuff forever,” said de Bever. “But we feel that’s not a good thing to do. If you identify someone who might be a good partner, do your due diligence and get on with it.”

As for co-investing with middle-market private equity managers, de Bever noted that the ones that would probably fit the best with AIMCo are those that are not household names but for which AIMCo could help with larger transactions than they could do on their own. De Bever noted that he is “absolutely happy” to hear from firms like that, whether or not they already have a relationship with AIMCo.

de Bever likes to point out that AIMCo can add more value to a deal than just coming up with money quickly, such as its ability to be flexible in how the deal is structured. AIMCo, he said, can help shape a transaction to have “the maximum chance of being successful and to generate a minimum of commotion with other parties involved, as opposed to saying, ‘look, how much money do you want? Here’s the check,’” said de Bever.

AIMCo would consider backing a fund in order to see more co-investment opportunities. Just make sure you want a partner that can offer capital along with expertise in deal structuring. And, if you’re looking to charge fees on a co-investment with AIMCo, forget it.