Tower of Dabble

AIG Global Investment Group (AIG GIG), with US$18.7bn invested in private equity and US$31.4bn in alternative assets under management, is rapidly moving up the league table to be one of the seriously influential investors in private equity. Though the group is based in New York, they haven’t been shy about investing in Europe.

In fact, 42% of the group’s assets are invested outside the US. AIG GIG, like every other private equity investor on the planet, is interested in European buyouts because of the quality of assets still held by corporate conglomerates. Many of these businesses need to get back to core competencies and have a desire to rationalise balance sheets against a backdrop of sluggish economic growth. However, purchase prices and liberal use of debt by European companies is concerning to the group.

Venture continues to be a difficult space and European venture even more so. Unlike the US where there are “ecosystems” such as Route 128 (Boston), Research Triangle (North Carolina), Sandhill Road (Austin, Texas) and extensive technology transfer efforts from university research, Europe has yet to reach a similar level – so AIG GIG is not investing heavily in venture.

EVCJ questions Steven Costabile, managing director and head of private equity funds group at AIG GIG to find out how the group makes investment decisions and where it will be investing its next US$18bn.

What is AIG GIG’s strategy for investment in private equity funds?

We aim to invest in the very best funds available in the market. We have over 200 people, across the globe, dedicated to private equity, with 25 focused solely on private equity funds. This means we have the size and scale to be intellectually curious, probing and analytical.

Have there been any legal or cultural obstacles which have held you back when doing investments?

We are required to work within an ever increasingly regulated environment. However, we leverage our advantage of having local people on the ground who understand local customs and regulations in the countries in which we invest.

What types of investments do you look for?

We are agnostic as to strategy or geography, but what we look for is evidence that general partners can execute their espoused strategies and investments are made in businesses that exhibit strong growth potential or companies with reliable cash flows.

What size investments do you make?

Fund investments range from US$10m to US$200m, co-investments alongside funds range from US$25m to US$100m for companies. We generally target cash flow positive companies, mostly minority deals, and need not have a board seat, but of course we are willing and able to have a majority holding and be active board members.

How do you assess the risks associated with new firms?

We are very open to ‘first time’ funds or firms that we have not dealt with in the past. What we look for are groups that do have principal experience in private equity and the historical skill set be similar to the espoused strategy of the new fund. We have a worldwide execution capability consisting of four key attributes. Firstly, proprietary deal sourcing is attained through market intelligence, strong relationships and deal flow. Secondly, we conduct extensive and thorough due diligence.

How do you put together your investment portfolio?

Manager selection. Manager selection. Manager selection. It is the most important element to a successful private equity fund of funds portfolio. We develop a ‘point of view’ about the private equity markets and the macro environment and which are updated every six to twelve months. This allows us to capture investment opportunities as they present themselves. While we are cognisant of private equity trends and analyse the dynamics driving those trends, we do not function as market timers but rather employ a consistent long-term investment strategy in private equity, cultivating relationships with the best private equity managers. During the process of manager selection, we try to build a consensus among our team members. Our senior investment professionals rate each potential investment then the shortlist is sent to the investment committee for review. These investments must have the support of at least 75% of the senior investment professionals before being recommended for the investment committee.

What is your due diligence process?

Only 5% to 10% of the investment opportunities sourced ultimately survive the due diligence process. We typically spend three months performing due diligence on each private equity fund that makes it through the evaluative process. Typically, a deal team consisting of at least one senior and one junior member is formed. That team does a first review and summation. This generally includes a review of the offering materials and the due diligence book, if available, and may also include an initial meeting with the sponsor’s principals. Strategy, track record, reputation, management continuity and competence are also analysed. Our second review consists of a site visit to the sponsor, background checks of key individuals and reference checks with portfolio company management, the sponsor’s service providers, existing and new investors, intermediaries (bankers, lawyers and consultants) and other funds that have worked in an investment syndicate with the candidate. We also analyse portfolio company metrics, such as revenue growth, purchase multiple, EBITDA growth, and many more. The results are then presented to the entire group for discussion.

What are the most important characteristics for a good fund manager?

We have determined that certain important elements have been accurate indicators of future relative out-performance:

1) Not to sound too much like Donald Rumsfeld but one who knows what they know and what they don’t know;

2) Fair sharing of ownership of the firm;

3) Not overpaying – staying cognisant of the environment in which one is investing;

4) Conduct peer review at early stages of investment.

How would you describe today’s investment environment?

The next four years will probably not be as good as the past four years, but can still generate the required relative returns investors seek. Private equity is the ultimate relative return strategy. There is a feeling that we are approaching some sort of inflection point and that to be successful in private equity, strategies used in the past may not be as successful in the future. Investors need to understand and anticipate the environment in which their capital will be put to work over the next four to five years when making commitments today.

What are AIG GIG’s plans for investing in private equity in the next year?

We intend to stay with managers that we trust and know, and explore strategies that we think might do well if we do have a change in the environment. In Europe we continue to seek country specific fund managers.

Why does AIG GIG focus on private equity?

Private equity is a very important component of AIG GIG’s overall asset allocation and we are focused on investing in private equity now for a number of reasons. Currently the return premium over public markets is excellent. It provides flexible capital that is able to pursue opportunities public equity or hedge funds cannot reach, captures innovative shifts and is an asset which is expanding globally providing increasing opportunities. Inefficiencies still exist – alpha opportunities, superior return potential due to complexity premium, financial risk premium and faster growth rates.

Private equity profile

• Private equity involvement since the 1980’s
• US$13bn in asset growth due to private equity investment performance
• Active oversight of Investment Committees
• Investment strategies – direct investments (growth, LBO, mezzanine, venture capital, infrastructure), limited partnerships (fund-of-funds)
• Regional or sector focused
• Global geographic diversification
• All key sectors – for example 20% fund-of-funds, 22% telecommunications
• Professionals in 26 locations

AIG GIG Facts

AIG GIG comprises a group of international companies which provides investment advice and market asset management products and services to clients around the world.

AIG GIG is a worldwide leader in asset management, with extensive capabilities in equity, fixed income, hedge funds, private equity and real estate.

• Total assets under management US$538.2bn (June 2006)
• Over 1,600 employees worldwide including approximately 450 investment professionals
• Real estate investments in over 564 properties totaling 53 million square feet