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, head of 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 says, especially with direct investments.
“It’s not hard to start running out of good opportunities if you confine yourself to the U.S.,” he says. “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% in 2002. “We have a mandate to be at that level,” he says. “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% 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% to 5% of the entire portfolio.
“We’re under-allocated in this category and have been for a number of years,” he says, estimating that attaining the allocation target is still three to four years away.
Of the $2.2 billion under Keehn’s management, about 65% is in buyout funds, 11% is in mezzanine-related funds, 7% in distressed debt and 10% in a category that includes venture capital and infrastructure investments.
We’re aware of the historical volatility in the [VC]category and that’s not something we are in love with.”
Peter Keehn, Head of Alternative Investments, Allstate
The venture capital investments Allstate makes are through funds of funds managers. “We’re aware of the historical volatility in the category and that’s not something the clients are in love with,” he says. Add that to the fact that most of Keehn’s staffers are former buyout investors and it’s easy to see why Allstate might be underweighted in venture. Still, there’s a chance that will change. Keehn expects to reassess the venture industry in the next year and a half to see if it is worth getting into.
Keehn declines to reveal the names of the funds of funds Allstate works with or the names of venture capital funds in which Allstate is an investor.
Despite its hands-off approach to venture, Allstate directly invests alongside its buyout 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 says. “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 says. “We’ve got a ways to go to get to that [target] allocation. We’ve tried to be slow and methodical.”
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 says. “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 calls “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 says.
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 fund-raising mode in the following year and whether those firms are good investment fits.
The track record, strategy and evidence of real value creation — that’s far and away what we focus on the most.”
Peter Keehn, Head of Alternative Investments, Allstate
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 who 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 says. “We’re banking on a group of people.” He continues: “‘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 says, 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 says. “We don’t want them to re-learn the game on our dime.”
Underlying the entire strategy, Keehn says, is a preference for managers who align themselves with their investors. While the market standard dictates that PE GPs return 80% of fee income to LPs, those that send back 100% 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 says.
Additional reporting by Alexander Haislip, Senior Writer, VCJ and Jeremy Harrell, Associate Editor, Buyouts.
Allstate Investments LLC
LOCATION: Northbrook, Ill.
FOUNDED: Allstate has been a PE investor since the 1960s.
CHIEF: Peter Keehn, Head of Alternative Investments.
TEAM: Ross M. Posner, Reynold Martin, Kevan Comstock, Julie Han
ALTERNATIVE PORTFOLIO SIZE: $1B ($2.2B including unfunded commitments)
ALTERNATIVE ASSET ALLOCATION: 1% of Allstate Investments’ $120B holdings
ALTERNATIVE ASSET ALLOCATION TARGET: 3% to 5% of overall holdings
ANNUAL COMMITMENT TO ALTERNATIVES: $600M – $700M
Source: Allstate Alternative Investments website