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Institutional Investor Profile: Godfrey Albertyn, Portfolio Manager, Futurebuilder, Metropolitan Asset Managers06/04/2006. Source: AltAssets. 
Godfrey Albertyn on Metropolitan's private equity fund investments, on private equity investing in South Africa, and on the role that private equity fund managers need to play in the South African transformation process.  South Africa's Metropolitan Asset Managers (MetAM) is a wholly owned subsidiary of Metropolitan Holdings, a financial services company, with its main business focused on life assurance. It has a market capitalisation in excess of ZAR8bn.
Godfrey Albertyn has been with MetAM for just over a year and has worked in asset management for about 20 years. Albertyn manages Metropolitan's Futurebuilder fund, a fund that was established in 1996. Futurebuilder's current size is around ZAR900m (approximately $142m). The capital comes from a variety of sources, including Metropolitan Life, Metropolitan Employee Benefits, Metropolitan Holdings, and a few third-party investors.
Albertyn was the first appointment dedicated to the management of the Futurebuilder fund.
What is the structure of the Futurebuilder fund?
'The Futurebuilder fund can be seen to be a fund of private equity fund of funds, though it is not officially structured as one. Futurebuilder has no fixed target and is an open-ended fund. Investors can come into our fund and leave the fund at any stage. The difficulty is that we make long-term commitments on the private equity side, while our third-party investors are often not required to make long-term commitments to Futurebuilder. We do need to keep a fair amount of liquid assets in the fund, which would not have to be there if Futurebuider was a typical private equity fund of funds.
Currently the ZAR900m in the Futurebuilder fund are split between private equity fund investments (about 13 per cent), other equity investments (about 39 per cent), bond investments (about 32 per cent) and other investments including property (16 per cent).
In the past few months we have made a real effort to significantly increase our allocation to private equity funds, but it is a long-term process. The private equity industry in South Africa is still not as developed as it is in some parts of the world; it is still very small and that makes it difficult to build up a diversified portfolio. That said, we have made new private equity commitments in excess of ZAR550m during 2005.'
Would you like to increase the amount of capital raised from third-party investors?
'Yes, definitely. However, it is very difficult to attract money from South African institutional investors into a fund that invests in unlisted assets. One reason for that is regulation 28 of the Pensions Fund Act, which prevents South African pension funds from investing more than 2.5 per cent of their total fund size into unlisted assets.
A number of pension fund trustees have been hesitant to invest in funds that focus on unlisted assets because of all the hassle and problems that come with the 2.5 per cent limit with regards to valuations, for example. Rather than going through all these issues, many decide not to put any money into the alternative asset class. This is one of the issues that we are facing, and until this issue has been resolved, we will not see any significant amounts of capital coming into our fund.
Changing the Pensions Fund Act has been on the agenda for a number of years. There are related issues that also need to be addressed - it is more than just increasing the 2.5 per cent limit. That is why I think it will take a while until we see significant changes.'
What type of investments do you look for on the private equity fund investment side?
'We focus on general buy-out funds that invest in South African companies. We also have some specialist funds - infrastructure, technology, and mezzanine funds - in our portfolio. Often we commit to funds that are successors to funds in which we invested in the past.
Last year we made commitments to five of the ten new funds on which we had completed due diligence. The past two years have been very busy in the South African private equity market, with almost all of the bigger firms engaged in fundraising. There have also been a number of smaller firms raising new funds. This year I have already taken three funds to due diligence level.
Our commitments have included funds managed by Brait Private Equity, Ethos Private Equity, Sphere Holdings, African Infrastructure Investment Managers (a joint venture between Macquarie Bank and Old Mutual Asset Managers). Currently we have eight private equity funds in our portfolio and we are looking to invest in another six over the next few months.'
What is your appetite for first-time funds?
'First-time funds are not really something I would look at because they are too big a risk. There are much safer options. However, there have been some good spin-outs.'
How do you find out about good investment opportunities?
'We definitely do not miss a larger fund coming into the market because we know all the fund managers and they know us. People generally approach us first, but it may also happen that I approach them first.'
How do you conduct your due diligence?
'Usually the first step is that the fund manager comes to us and presents his firm and his new fund to me and one or two of my colleagues. If our main criteria are met, such as track record and consistent strategy, we visit the fund manager's offices. At that stage we take a closer look at the team's track record, at its past and present portfolio companies and at how the team adds value to its portfolio companies.
In the South African context, black economic empowerment is a very important issue, and that also has to be reflected in the way the fund manager manages his business and also in the way he manages his portfolio companies. We want to see that the fund manager is committed to the transformation process in South Africa. We assess who is in the fund management team and how carried interest is shared among the team. We would like to see the investment industry being transformed in terms of these issues.
Once we are satisfied with all that, I submit a motivating report to our investment committee, which is made up of MetAM's chief investment officer, the managing director and a few other portfolio managers. Altogether there are seven people sitting on the committee.
I meet with the investment committee on a monthly basis to go through all the investment proposals. At the same time I also update the committee on recent developments in our portfolio.
Following the approval by the investment committee we negotiate the final terms and conditions of the partnership agreement.
Often there is another level to our approval process because the investment committee is not authorised to sign off commitments that are larger than ZAR20m. Any investment above that also needs to be approved by the investment committee of our holding company, Metropolitan Holdings. This is quite often the case because our average commitment size is around ZAR50m. The largest commitment we have made to date is a ZAR100m commitment to the African Infrastructure Investment Fund. Our smallest commitment ever is ZAR13m.
In many of our funds we are not the major investor. We typically take stakes of between five and ten per cent in the funds we invest in.'
What does your monitoring process comprise?
'We get a quarterly report from every fund manager. It states what is happening in the underlying portfolio companies. All the fund managers would have at least an annual investor meeting, which I would attend. On an ad hoc basis I would meet with some of the managers, and increasingly I contact managers at the funds' portfolio companies.
The relationship between us and the funds in our portfolio is designed to be long-term. Over time we always find out whether fund managers actually do what they say they are doing. We will not support managers that do not tell the truth.
If things are going wrong we want to be informed immediately and we want to know what the fund manager does to correct the direction.'
Do you invest directly?
'We do have direct investments in our portfolio and there are quite a number of interesting opportunities that we have been looking at. Some members of the investment committee would like me to increase the allocation to direct investments because they question whether we get a good return on investment on the fees that we are paying to private equity fund managers.
The way I see it is that at the end of the day, when you do direct investments, you need to do your own due diligence and you need to spend time to sit on the board of those companies. That means there are costs involved in any event. If in the future we beef up our alternative assets investment team, we will probably use some of the extra resources to do more direct investments. We currently have around ZAR55m invested in six direct investments, and another ZAR120m approved in five investments.'
What are the major trends in the South African private equity business at the moment?
'I think the private equity industry in South Africa is growing at an increasing speed. Pension funds will always look for ways to increase their returns and as long as private equity continues to do well, it will be a destination for investors. The public equity market has performed very strongly over the past two years, and the search for additional returns could, at the margin, drive some investors to seek out private equity opportunities. I think there is going to be more of an appetite for private equity overall.
In recent years we have also seen the larger funds doing bigger deals, either by themselves, together with co-investors, or as part of a syndicate. They have taken reasonably-sized public companies into the private space, becoming more visible in the market. Investors are now more interested in what is happening in the private equity market.'
What advice would you give to a new private equity investor?
'I would recommend that international investors take a closer look at our private equity market. They will probably be pleasantly surprised at the depth of South Africa's private equity market and the quality of some fund managers. Also, in political terms, South Africa has become much more stable and that has created conditions which are conducive to stronger economic growth on a more sustainable basis.
My other piece of advice to investors is that they must be careful when fund managers use terms and conditions that are non-standard. It immediately brings questions with it as to why they are non-standard.'
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