What Colombia’s Second-Largest LP Wants

Omar Rueda Galvis, vice president of investments for Colombian pension fund Protección, says that private equity plays a vital role in the overall portfolio.

Rueda Galvis’ views are important for any private equity firm to understand. Colombia has become an important new destination on the fundraising trail because of the growth, sophistication and international focus of its local institutional investors. Protección is the second-largest pension fund in the country, with some $27 billion in assets under management and a roughly 10 percent allocation to private equity. The pension commits capital to established international groups and is nurturing a generation of local GPs.

Protección also recently became a co-investor, alongside Advent International, in Oleoducto Central, Colombia’s largest crude oil transportation system.

In a February interview with Privcap, Rueda Galvis discussed the genesis of ProtecciÓn’s private equity program, the regulatory limits of its allocation policy, and what GPs need to know before they try to book a meeting with him.

Privcap

Why in 2010 did your organization begin allocating to private equity?

Rueda Galvis

We were looking for exposure to different asset classes. So we decided in 2005 to have a relationship with funds of funds in the international world.

They make precise determinations of what the future runoff of that fund is going to be and invest in interest-bearing securities. Once one or two of the big states or municipal plans goes in this direction, it’s a domino effect. Illinois may be one of the first ones, because they have the biggest problem.

For Colombian pensions, we have different limits for local private equity and for offshore private equity. In both cases, we have a “five” limit—five percent for local private equity and five percent for international.

In 2005—as soon as the regulator allowed us to invest in this asset class—we started to have conversations with funds of funds in the international markets. That was the way to tried to learn about private equity. At the same time, we supported the idea to create the private equity industry in Colombia. In other words, we were looking for good teams to manage the money for us.

At the beginning of 2008, before the bubble, we decided to have more exposure to secondary portfolios and buyouts. We started to speak with another kind of GP—the well-known names like Blackstone, KKR, Lexington, Partners Group. We were also working on the idea of having private local funds.

That was so difficult, because when we started to compare the experience of the international teams with the Colombian teams, we recognized we have a huge gap. We realized we were going to have more risk with these local funds than the international funds.

We learned a lot. We developed an in-house due diligence process to pick the best managers and decided to create a team focused on legal, risk, and investment areas.

Privcap

What role does private equity play in ProtecciÓn’s overall portfolio?

Rueda Galvis

The reasons [for private equity] have to do with the target replacement rates of our affiliates. That means that in creating our asset allocation, we must have a really good portfolio that is going to give a really good return over a long time horizon, with the idea to have a replacement rate around 17 percent. We started to see a lot of problems trying to get this higher return. So there is one way to try to get a lot of exposure to equity, and it’s through private equity.

Privcap

Please paint a picture of the private equity portfolio that ProtecciÓn has built to date.

Rueda Galvis

Normally when we want to invest in international private equity, we want exposure to the lower end of the market. We are looking for GPs with these kinds of strategies. Around 50 percent of our portfolio is focused on the United States and the rest is global, meaning Europe, Japan, Asia, and a little bit of emerging markets, especially Latin America. We have lower exposure to emerging markets because Colombia is an emerging market.

Privcap

Are you working with the local market to encourage further development of private equity firms?

Rueda Galvis

We want to “copy” the standards that the international GPs have—we want the local GPs to have the same kind of standards. We have found that at the beginning of the process with the local private equity firms, we have a lot of issues about the information that they give us as investors.

In Colombia, the GPs decided to have the same management fee as the international GPs. In the international market, you can see a track record. Here there is no track record.

The challenge that we have right now is that private equity is important in our asset allocation. We are close to the maximum limit of 5 percent. So now we have to have another conversation with our regulators and try to show them how important it is for us to have exposure to alternative investments. We would like to increase this limit—maybe 5 percent more.

Privcap

Colombia has become a popular place not only to deploy private equity capital, but from which to raise capital. What should an international GP know about your program before trying to set up a meeting?

Rueda Galvis

Before we have any kind of meeting with a GP, at the beginning of every year we have our asset allocation where we ask what kind of strategy we should focus on in the private equity program. For example, [we decide] if we would like buyouts, or secondaries, or the mid-market. This year, we believe buyouts are not the best idea. The market is expensive, so we are thinking about other kinds of strategies.

In 2005 we started to build the private equity program. Right now we have too many GPs in the portfolio. So we are in the process of trying to cut to a minimum number and work with them.