PRINT THIS PAGE Institutional Investor Profile: Peter Keehn, Head of Alternative Investments, Allstate Investments, LLC29/06/2006. Source: AltAssets. 
Peter Keehn on Allstate's preference for industry sector-specific funds, on the qualities that his team is keen to see in a good GP, on what puts them off investing with certain funds, and on Allstate's thorough due diligence process.  Allstate is a large publicly held personal lines insurance company in the US. Allstate Investments is its captive investment management company, which manages approximately $120bn in total assets - most of it coming from affiliated insurance and pension entities.
The Alternative Investments Group within Allstate Investments is responsible for Allstate's activity in buyouts, mezzanine, distressed debt, venture capital, and related areas. The group has just under $2bn under management. Over the years Allstate has been gradually increasing its allocation to private equity, with a long-term asset allocation goal well above its current level.
Allstate made its first investments in private equity funds back in the 1980s. The company's alternative investment business traces its roots to an organisation called Allstate Venture Capital, a direct venture capital investor, founded in the 1960s.
Peter Keehn joined Allstate in 2003 as its head of alternative investments, charged with expanding Allstate's presence in the alternatives markets. He began his career in the 1980's in institutional real estate investment, and later joined the private placement group of another major insurance company and subsequently a private equity firm in Chicago.
What type of investments do you look for?
'Today our portfolio includes 85 investments, mostly funds and a smaller number of direct investments. The number of funds we are committed to has been increasing over the years. We seek fund investments across a broad range of categories including buy-outs, mezzanine, distressed and some other categories. Around 60 per cent of the funds in our current portfolio are buy-out funds, and these are diversified across industries, transaction sizes, and in other ways. The next largest category is mezzanine, which makes up between 15 and 20 per cent of our portfolio. We also have some exposure to distressed funds and we have been increasing this position modestly. Venture capital is a smaller category for us.
Geographically, we distinguish between domestic and international investments, which is relevant in part because Allstate's liability structure is nearly all North American.
We track our underlying geographic exposure down at the portfolio company level. For example, a GP that is thought of as US-based may also acquire European businesses, and we will count this exposure as international. On this basis, the portfolio is just under 15 per cent international, and this will increase over the next few years. The biggest non-US component is Western Europe, and we also have meaningful exposure in Canada.
A region that we are currently looking at closely is Asia. We have not yet made a commitment to a fund that is dedicated to Asia. The same is true for some other regions such as Central and Eastern Europe and South Africa, to which we have devoted a lot of time. I expect that we will make commitments to some of these areas very soon.
Our bite size ranges from around $25m to $60m, although we have made investments as small as $15m and as large as $75m. There are narrower ranges for different categories of the business. For example, our international commitments are in a relatively tight size band, and the average size is smaller there than for our domestic commitments.
Our bite size has been increasing modestly and by design. However, we think that increasing it too much could decrease our flexibility in the marketplace.
As with many other investors, we do many re-ups. About 20 per cent of our commitments so far this year have been re-ups and by year-end we expect that figure to be much higher, based on our discussions with sponsors coming to market in the second half of the year. We have re-upped with the majority of the opportunities that we have had this year, a trend I certainly expect to continue.'
How many commitments will you make this year?
'We are looking to make between $500m and $600m of new commitments this year, targeting roughly 13 to 15 new funds.
Our team believes that there are a lot of fund investment opportunities out there, but finding the right ones is always challenging, and that makes determining which factors can make a great fund great all the more important. In today's market you need to establish which deals you like and which ones need to be pursued quickly because many deals move at a pretty rapid pace.'
What are the qualities of a good GP?
'The experience of the management team and their prior success executing a similar strategy are two very important factors. We also want to see clear evidence of a team's desire to commit a lot of their own money alongside ours - we like people who are eager to eat their own cooking. Other criteria are: good internal management of the firm and team retention, along with the ability to successfully deploy capital and make money in a variety of different market conditions.'
How do you find out about good investment opportunities?
'A very meaningful number of the funds we see come to us from the placement agency community. In addition, groups approach us directly, and we also do some networking to find out about groups.'
How do you conduct your due diligence?
'Our due diligence process is far-reaching and hard to summarise. Ultimately, we look at every prospective deal in two ways: first in isolation, to see that it stands on its own merits; and secondly we see how the deal fits in the context of our existing portfolio. We obviously do not want to load the portfolio with a lot of people pursuing the same strategy, but there are areas where we are actively seeking greater levels of exposure.
The process begins with an initial analysis and generally a meeting with the team. Then we have an internal discussion about whether it makes sense to move forward. If the answer is yes, our effort really begins in terms of gathering and analysing data, interacting with the GP, and researching people's track records. We look at whether the factors that made a team successful in the past are still present today and whether their strategy still makes sense in today's market. We also look at the proposed terms to determine how well the interests of the LPs and the GPs are aligned. The process can take weeks or months, depending on how complex it is and how well we know the group.'
What are the reasons why you have recently turned down funds?
'The main reasons have been: concerns about the origination ability, concerns about the ability to consistently improve operations and grow company-level cash flow, a focus on industry sectors that we are more cautious about, and performance issues related to portfolio company problems that have not yet been resolved. We get concerned when a firm still has a fair amount of work to do on its previous fund - we need to understand how a team will balance this time-consuming process against investing the new pool of capital. We have also declined funds when firms have significantly increased their fund size from the previous fundraising effort, which can put the sponsor into a very different deal environment with very different participants than the one where they built their prior success.'
What is your opinion on first-time funds?
'We have no real appetite for first-time funds raised by first-time investors but we do look at spin-outs. With first-time funds raised by a team that has spun out of a larger organisation, we focus on company culture issues a lot.'
Do you prefer generalist or sector-specific funds?
'As the asset class has evolved it has become very tough for true generalists to consistently make money. It is difficult to have an edge when you are operating in an industry sector in which you do not have much depth. On the other end of the continuum, a very focused sector fund requires us as investors to make two bets: one on the team, which we are always making, but then also a bet on the sector, particularly around timing. We have done some very specialised funds but it is a different kind of analysis. The model that we prefer is groups that concentrate on a few clearly-defined sectors, where they have developed some expertise and demonstrated success as investors.
We have had a lot of existing exposure to energy-related funds and that has turned out to be a very good bet in the current environment. We have recently taken on exposure to the media, technology and healthcare sectors.'
Do you do secondaries?
'Yes, we have done some secondary work, principally as a portfolio construction tool.'
What is your interest in direct investment/co-investment opportunities?
'In our portfolio there are several direct investments that we have been managing for a while. Going forward, we will be developing our capability as an equity co-investor with our sponsor partners, and may look at other related ways to invest directly with them. However, fund investing is what fundamentally drives our business.'
What advice would you give to a new private equity investor?
'Be realistic about your return expectations - in terms of level, volatility, and timing. Starting a new portfolio in this business takes time, and money goes "into the ground" for a while before it comes out, particularly compared with other asset classes.
A new investor also needs to develop a process that focuses very hard on the origination of opportunities and good underwriting of those opportunities, because in a market like this, the difference between a great fund, a good fund and a bad fund will ultimately be very significant.'
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