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LP Profile: Allstate Looking Abroad As It Builds Buyout Portfolio

Name: Allstate Investments LLC

Leader: Peter Keehn, Head of Alternative Investments

Size Of Alternatives Portfolio: $1 billion ($2.2 billion including unfunded commitments)

Alternative Asset Allocation: 1 percent of Allstate Investments’s $120 billion holdings

Target Allocation for Alternatives: 3 percent to 5 percent of overall holdings

Annual Commitment To Alternatives: $600 million to $700 million

If nothing else, insurance companies are preoccupied with risk. It might not come as a surprise, then, to learn that the alternative investments arm of insurance giant Allstate Corp. has adopted a measured and sober approach to the asset class.

Consider, for instance, that Allstate Investments LLC commits to few, if any, debut funds. Or that Allstate isn’t a big fan of LBO shops that seek to significantly upsize a successor fund. Or that Allstate doesn’t like generalist players, instead preferring general partners that focus on specific industries.

But that doesn’t mean Allstate, based in the suburban Chicago setting of Northbrook, Ill., isn’t afraid to spread its wings. Under the direction of Peter Keehn, who heads up Allstate’s $2.2 billion portfolio of alternative investments, Allstate is looking to beef up its international profile, starting with a new office in London scheduled to open this fall. Within a year, Allstate’s alternative assets group should have three professionals on the ground in London, which will help Allstate be “more nimble,” Keehn said, especially with direct investments.

“It’s not hard to start running out of good opportunities if you confine yourself to the U.S.,” he said. “There are good reasons for diversification, to be part of the global economy.”

Keehn’s goal is to eventually make one-third of Allstate’s alternative investments international, up from about 11 percent in 2002. “We have a mandate to be at that level,” he said. “We’ve made a conscious effort to source good fund sponsors that are located and do investments outside the U.S.” Allstate plans to back funds operating in such markets as Europe, Asia, South Africa and South America.

Back at home, one of Allstate’s main goals is a broad-based increased in the size of its alternative-asset allocation. Keehn’s team invests between $600 million and $700 million annually in about 20 funds as well as on direct investments in deals. Keehn’s portfolio has a book value of $1 billion—$2.2 billion including unfunded commitments—and it represents about 1 percent of the $120 billion held by Allstate Investments.

That percentage is too low for Keehn, who eventually wants Allstate’s allocation to alternatives to account for 3 percent to 5 percent of the entire portfolio.

“We’re under-allocated in this category and have been for a number of years,” he said, estimating that attaining the allocation target is still three to four years away.

Of the $2.2 billion under Keehn’s management, about 65 percent is in buyout funds, 11 percent is in mezzanine-related funds, 7 percent in distressed debt and 10 percent in a category that includes venture capital and infrastructure investments. Allstate also does some direct investment alongside sponsor partners. All told, Allstate has made commitments to more than 60 general partnerships, including Apollo Management, Cerberus Capital Management, Sweden-based EQT Partners, GTCR Golder Rauner and Sterling Capital Partners.

Proportionally speaking, Allstate’s allocation to buyout funds will remain largely static, but in absolute terms its allocation will grow as the entire portfolio of alternatives gets bigger, Keehn said. “We will make $600 million to $700 million in new fund commitments this year. That’s up from last year and up from the year before,” he said. “We’ve got a ways to go to get to that [target] allocation. We’ve tried to be slow and methodical.”

Shifting Focus

Allstate can rightly claim to be one of the oldest investors in alternative assets. In the late 1960s, Allstate Corp. launched a subsidiary called Allstate Venture Capital to make direct investments in companies like Federal Express and Controlled Data. Allstate has since gotten out of the direct-venture business because, as Keehn said, “Our only goal is to help our sponsor partners with our direct investments.”

Allstate’s relatively new focus on buyouts as an investment strategy began about five years ago, shortly before Keehn joined Allstate in 2003, arriving from Waud Capital Partners, where he was a principal of the private equity firm. Prior to that, Keehn, who holds an MBA from Northwestern University and an AB from Brown University, served as director at Northwestern Investment Management Co., a unit of the Northwestern Mutual Life Insurance Co.

Allstate’s commitment size ranges from $25 million to $50 million, depending on the size of the fund. Allstate is in funds as small as $100 million and as large as $15 billion, with what Keehn called “meaningful exposure” to funds along that continuum. “Our view is there are great sponsors making money at every one of those stopping points along the way,” he said.

Allstate’s annual investment decisions typically begin coming into focus during the fourth quarter of the previous year, when Keehn and his colleagues assess the market to figure out which GPs are likely to be in fundraising mode in the following year and whether those firms are good investment fits.

Given Allstate’s penchant for spreading risk, the 10-person group prefers GPs that specialize in a handful of sectors. Those firms, according to Keehn, combine the best of sector-specific knowledge with a strategy that doesn’t place all bets in one segment. Less preferable, he said, are generalists that will invest in pretty much anything.

Perhaps the most important investment criterion Allstate considers, however, is GP track records. Specifically, Keehn said his team explores how sponsors made money in the past, and whether those factors are still present today. His team analyzes whether LBO firms’ previous success was attributable, for instance, to a good industry sector bet, or whether a firm made money because of a few key people who might no longer be there.

“We try to dig into the mechanics of the fund, focus on the team of people, their processes and their theme development,” Keehn said. “We’re banking on a group of people.” He continued: “‘Replicable’ is a word we focus on most. The track record, strategy and evidence of real value creation—that’s far and away what we focus on the most.”

For that reason, Allstate rarely backs first-time fund managers. Same goes for new partnerships consisting of individuals who have strong track records but no history of collaboration. Keehn said his team would rather see them work through a first fund and iron out the organizational kinks. At the same time, Allstate is more likely to commit to a spin-out team comprised of experienced partners who have worked together before. Allstate did just that earlier this year, backing an undisclosed spin-out team from a firm that Allstate is also happy to invest with.

It’s probably not shocking to learn that Allstate also cautiously approaches firms that seek to raise significantly more money with successor funds. Those managers, Keehn said, could be ill-equipped to play in a new terrain and under a new set of rules.

“They’re dealing with a different universe of intermediaries, lenders and competitors,” he said. “We don’t want them to re-learn the game on our dime.”

Underlying the entire strategy, Keehn said, is a preference for managers who align themselves with their investors. While the market standard dictates that GPs return 80 percent of fee income to LPs, those that send back 100 percent get Allstate’s attention. After all, that encourages private equity firms to focus exclusively on maximizing their portfolio returns, and isn’t that what this business is all about?

“We find our best sponsor partners are most excited by making multiples of money on their investments,” Keehn said.