Capital & Corporate interview with José Luis Jiménez, Group Chief Investment Officer at MAPFRE

MAPFRE has taken a major step forward in its alternative investments strategy, committing heavily to private equity with the launch of a fund of funds that is open to institutional investors through a co-investment model. The company’s Group Chief Investment Officer, José Luis Jiménez, spoke to C&C about the asset class vision and the reasons why private equity is starting to play a more prominent role in the Spanish insurance group’s strategy, receiving around 25 percent of the overall 1.05 billion euros earmarked for alternative investments. The structure the company has chosen is an Evergreen or permanent vehicle, to which MAPFRE has committed a total equity of 250 million euros. It is also the first instrument launched with Abante Asesores since MAPFRE acquired a 10 percent stake of the financial advisory firm’s capital in 2019. Altamar Private Equity will act as the investment advisor for the vehicle.

What was MAPFRE’s alternative investments strategy prior to the pandemic?

In reality, we had very limited exposure. We had a plan approved by MAPFRE’s Board of Directors to diversify and advance our alternative investment strategy in order to protect profitability in the prevailing climate of low interest rates. Unlike other European competitor groups, whose exposure in alternatives was perhaps already 10 percent or 20 percent, we started almost from zero. This gives us a significant advantage when it comes to diversifying our portfolio. Of course, interest rates affect us all, but at least we have the ability to diversify our portfolio. More than a year ago, MAPFRE’s Board of Directors authorized raising a further 1.05 billion euros for alternative investments, of which around 25 percent has been allocated to private equity. That is, the Board of Directors authorized a further 500 million euro provision to alternative investments, in addition to the 550 million euros previously approved. However, this remains a small percentage of the total assets managed by the Group, which reached 59.27 billion euros at the close of the quarter. Furthermore, the pandemic-based market context provided a good opportunity to invest at more reasonable prices. We were already seeing some overheating in certain asset types before the COVID-19 outbreak, not only in unlisted investments but also in some listed companies in Europe and the United States. In the case of private equity, agreements are also being closed that involve extremely high multiples. In this regard, we believe that the crisis will bring with it a little more moderation and some adjustments. Over the next few months, prices will adjust according to the current cycle we’re in right now, i.e. we will see an adjustment in valuations. That’s why we think it’s a good time to invest.

Warren Buffet’s famous quote comes to mind: “it’s only when the tide goes out that you learn who has been swimming naked.”

It’s difficult to sum things up more succinctly and while retaining a sense of humor. There will probably be a valuation adjustment period until we overcome the gap between the prices being offered and the prices expected. We’ve designed an investment program with an attractive risk-return profile that allows MAPFRE to achieve long-term, stabilized asset exposure, while at the same time gaining access to the best international investment opportunities. In short, private equity will provide diversification. It’s also an asset that is less volatile in adverse cycles and is usually less tied to market correlation when compared to other traditional assets.

Alternative assets have taken on greater significance, becoming crucial assets in any portfolio, but what advantages does private equity have over other assets?

First of all, I would highlight its attractive risk-return profile. International venture capital investment has great advantages in maximizing portfolio returns in terms of risk/return. Private equity has consistently generated significantly higher medium- and long-term returns with attractive profitability levels. We can also add its low long-term correlation to public markets in addition to the consistent outperformance of private equity returns when compared to other traditional assets. Private capital provides diversification to the investment portfolio and, at the same time, allows for much wider exposure to corporate capital than is accessible through public markets (by region, sector, company size, etc.). Furthermore, it also enables companies to be managed more actively and with greater dynamism in management teams when it comes to applying levers to create value in participating companies. That’s why capturing and creating value requires great operational skills, patience and discipline.

This increase in investor interest has led to significant growth in the supply of managers over the past few years.

Yes, it’s a trend that has also triggered a “fly to quality” to the best funds by creating constant surplus in demand and complicating access to those funds. Another trend that we’ve observed with interest is that today, the number of listed companies is virtually the same as it was ten years ago. A significant number of companies are showing no interest in being listed on the stock exchange, preferring instead to remain private. This will undoubtedly lead to a positive trajectory for private equity over the coming years. We’ve formed an FCR in Spain with our partner, Abante, and we also sought a partner that was an expert in selecting the underlying funds, with a track record that was also outstanding. We found this in the form of Altamar.

Why have you adopted an Evergreen or permanent structure with an unlimited term for the vehicle?

Basically, it’s another distinguishing feature, it’s an Evergreen or permanent vehicle — a type of fund that meets the needs of insurers as well as other institutional investors who invest in very long-term assets, due to the nature of our business. In contrast with traditional private equity funds, which have an average lifespan of around 10–12 years, this vehicle has an unlimited term. It’s a structure that will involve permanent investment, which gives us a constant and stable flow. Another important aspect is the decline in the effect of the “J curve,” which is mainly associated with the payment of expenses and fees that are typical of the first years of a fund’s life cycle, during which returns are scarce or non-existent. In that process, considerable weight is placed on secondary markets and especially on the investment profile, which I would dare say is quite conservative within the world of private equity. In short, what we have done is establish a vehicle that is highly oriented toward insurance companies. It isn’t the typical fund of venture capital funds; we adapt it to the insurer’s own specific needs, while constantly taking into account the preservation of capital and the securities we have. The private equity fund of funds is open for other institutional investors to be able to co-invest with MAPFRE — that’s how it is. We’re offering the possibility for other institutional investors to participate thanks to a co-investment model. MAPFRE has committed 250 million euros of our own equity and we are open to other companies joining, as has already happened previously with other vehicles. If companies decide to join, they’ll be most welcome and we’ll be happy to co-invest with them under the same conditions. Co-investments are probably among the most appealing initiatives to institutional investors right now, sharing an investment experience by accessing assets that would otherwise be unavailable.

The opportunity presented by the market is as good for investors as it was in 2001, 2009 or 2012. Are vintage years really on the way?

I think so. The market situation is very attractive for investors and may lead to very appealing opportunities over the next few months. We’re at a low point in the cycle. It’s true that the State of Emergency has generated a lot of uncertainty and a reduction in consumption and investment. It’s an environment with little optimism where most market players and participants will be feeling more realistic and pragmatic.

MAPFRE has committed total equity of up to 250 million euros for this fund of funds. What do you expect to be the final size of the vehicle?

Indeed, we’ve committed 250 million euros but the vehicle may reach 300 million or 400 million euros. In reality, we don’t have a hard cap, the fund will grow in proportion to how comfortable the investors feel and how certain we feel about the operations. The capital call processes are going well. MAPFRE Private Equity FCR, which is registered with the Spanish National Securities and Exchange Commission (the “CNMV”), will bring together the existing private equity investments undertaken by all of the Group’s companies, as well as those to be undertaken going forward, and will have a very conservative strategy, in line with our investment policy.

Given this conservative investment strategy, what percentage of the portfolio will be invested in primary funds? How will it be supplemented with secondary funds?

Obviously, there is strategic and geographical diversification. The aim is to create a portfolio that is balanced in terms of risk and return, which will cover various investment periods, company sizes and geographical regions, although it will be focused mainly in US and European markets. Out of all the strategies, we are opting for the most conservative one. The fund will invest 75 percent in primary funds and up to 25 percent in secondary funds, where we are already seeing attractive opportunities, both in this fund and in other infrastructures, with regard to operations with investors who need to divest or sell positions to gain liquidity. In terms of diversification by geography, exposure will be 45–50 percent in Europe, the same percentage in the US and 5–10 percent exposure in Asia. We’ve looked for a clear global diversification strategy by avoiding exposure to emerging markets.

Will the strategy be especially focused on buyout funds?

Yes, the investment strategy will focus mainly on buyout funds, with an exposure of 70–80 percent. There will also be diversification based on the size of the funds, between megafunds (5–10 percent), high segment funds (20–30 percent) and lower mid-market funds (60–70 percent).

It’s worth recalling that the vehicle represents another step forward in the development of the strategic alliance with Abante, the financial advisory firm in which MAPFRE acquired a 10 percent stake back in 2019.

This is the first vehicle that has been created with Abante, but last September we launched another: an infrastructure fund together with the Macquarie Group, the world’s largest infrastructure management firm. The 200 million euro vehicle called MAPFRE Infraestructuras FCR, also managed by Abante, will invest in funds from the world-leading Australian infrastructure company. In this case, we will provide an initial capital of 50 million euros and will invite other institutional investors and private banking clients to participate in the fund under a co-investment model.

Gradually, we are making progress in our alternative investment strategy, while also providing an opportunity for institutional investors, who can gain access to very interesting assets with predictable cash-flow and low correlation with other listed assets. In addition, we do this together with companies who are world leaders in each sector, with a high level of specialization, as is the case with Macquarie in the infrastructure sector and Altamar in the case of private equity. In the real-estate assets area, in Europe we’ve also entered into various alliances with GLL Real Estate Partners, the real estate branch of Macquarie Group, and with Swiss Life, a Swiss insurance company, with whom we launched a real estate vehicle in France.

Such initiatives are common among insurers in other countries, but in Spain the current regulations are not conducive to investors entering the sector due to high fees.

The fees are lower in our products due to the amount we invest. In general, however, the fees will also be adjusted, most likely downward during the crisis. In private equity, as in other alternative assets, smaller, newly created companies have emerged, who are perhaps the ones that will suffer the most over the next few years. The sector is also moving toward consolidation, as is happening in asset management and private banking. Under these circumstances, it isn’t just the firms that best adapt who survive, it’s also those in the strongest position. That’s why we wanted to work together with very solid and experienced partners.