Fundraising for Alternative Investments in Latin America: Challenges, opportunities and what lies ahead

Q&A SESSION WITH PHILIPPE STIERNON, FOUNDER, CEO AND MANAGING PARTNER AT ROAM CAPITAL

ROAM Capital (“ROAM”) is a leading Latin American placement agent and advisory firm that is exclusively focused and highly specialised in alternative investments. Since its inception in 2011, ROAM has positioned itself as a research and fundraising powerhouse, having raised in excess of $5 billion from Latin American investors for some of the world’s leading alternatives fund managers. Following the firm’s success as a multi-year winner in Pan Finance’s “Best Fund Placement Agent in LatAm” category in 2021, 2022, and now in 2023, we sat down with ROAM’s Founder, Philippe Stiernon, and discussed his background and the motivations that led him to launch the first alternative asset placement business in Latin America, as well as the firm’s outlook for 2023 and beyond.

FIRST OF ALL, CONGRATULATIONS ON THE AWARD FOR A THIRD CONSECUTIVE YEAR AND ROAM’S SUCCESS OVER THE PAST DECADE. WHAT WERE YOUR MOTIVATIONS WHEN YOU DECIDED TO LAUNCH ROAM IN 2011?

I had the privilege to have a great education at Georgetown University, where I majored in Finance and also obtained an MBA. Professionally, I also had great mentors who taught me the importance of discipline and the power of specialization. One of my earlier career mentors at Merrill Lynch used to say, “the world has gotten way too competitive to be a generalist” and I guess that really stuck with me. I launched ROAM in 2011 with a two-fold purpose, first to institutionalize the alternative fund distribution business in Latin America for the benefit of GPs and second, to help Latin American LPs access the very best risk-adjusted alternative fund managers. The industry was very nascent back in 2011, and to my surprise there was not a single group that was solely focused on alternative investment distribution (ROAM’s only line of business), that was conducting real diligence (the hallmark of our distribution strategy) and that was investing its own capital, a key requirement for ROAM from an alignment of interest standpoint, investment minimum permitting. I saw the opportunity to specialise and pioneer a business with all these elements within this interesting “niche”, which has now become a dominant asset class in investor portfolios, so I guess you can say the bet has paid off.

HOW WAS THE ALTERNATIVE INVESTMENTS INDUSTRY IN LATIN AMERICA BACK THEN, AND HOW HAS IT EVOLVED DURING THE PAST 10 YEARS?

Commitments by Latin American institutional investors to alternative fund managers really started in Chile and Colombia back in 2008-2009 and at the time, there was very limited knowledge and dry powder available, making it a niche asset class. The usual GP suspects, such as mega buyout funds, established secondary players and the global funds of funds took the lion’s share of available commitments. Since then, the level of sophistication has grown, and the size of the programs has matured to the point that now, aggregate institutional assets under management represent almost $1 trillion with approximately $100 billion allocated to alternative asset. In terms of the participants, the opportunity set has also broadened and paved the way for institutional investors in countries like Peru and Mexico, to join forces, and become significant players, particularly in Mexico were the size of the pension plans is very big and the programs are not as mature as in Chile and Colombia. Increased levels of sophistication and the varying maturity of the respective programs also shifts allocation preferences. Depending on geography and the regulatory framework, now you see LPs looking to add funds in middle-market buyouts, growth equity, credit and even venture capital. Being at the forefront, it has been interesting to witness the evolution of the alternative industry in Latin America and seeing all the great benefits it has brought to investors and managers.

WHAT ARE THE MAIN CHALLENGES YOU BELIEVE LATIN AMERICAN INVESTORS HAVE FACED AND WILL FACE GOING FORWARD?

The main structural challenge that at least, Latin America institutional investors have always faced, stems from the complex and ever-changing regulatory frameworks that depend largely on each country’s unique political landscape. Although this is hardly a novelty in the region, given Latin America’s long history of political instability, during the past 5 years it is something that has really exacerbated given the political tendencies and the populist movements that have surfaced in many of the largest markets in the region. Another important challenge that derives from political instability is the devaluation of the local cur- rencies, a systemic problem in Latin America, which coupled with the denominator effect (a global phenomenon), has reduced available dry powder. This of course impacts portfolio construction, asset allocation, and puts additional pressure on regulation reform. Overall, Latin American investors face a wide range of challenges that require deep understanding, local proximity, careful consideration, and strategic planning to navigate them both from a fundraising and investment standpoint. Perhaps the only silver lining is that as the political and macroeconomic picture further deteriorates, Latin American investors will seek even a stronger refuge in international alternative investments with the limited dry powder available.

WHAT DO YOU THINK HAS BEEN THE ROLE OF ALTERNATIVE INVESTMENTS FOR LATIN AMERICAN INVESTORS WHEN NAVIGATING THIS COMPLEX POLITICAL ENVIRONMENT?

As previously noted, the role of alternative investments has varied widely depending on each country’s specific set of circumstances, but some general trends have emerged that we can point to. Institutional and private investors alike have rapidly turned to alternative investments as a safe-haven to avoid public market volatility and mute the infamous mark- to-market. They have also utilised alternative investments to further diversify portfolios and mitigate the risk of exposure to local assets, creating a “flight-to-quality” dynamic, particularly to US Dollar denominated assets. In an environment of high inflation and rising rates, the illiquidity premium offered by alternative investments (historically -600 basis point and more than 1,000 basis points for some top-quartile funds), has become a great way to offset this inevitable (and hopefully temporary) wealth erosion process. Therefore, increased allocations to international alternative investments have greatly rewarded Latin American investors, helping them boost alpha, mitigate risk, and provide an important layer of resiliency against the region’s political and economic volatility. It has definitely had a net positive effect.

WHAT DO YOU CONSIDER TO BE THE ROLE OF LATIN AMERICAN PLACEMENT AGENTS AND WHAT SETS ROAM APART FROM ITS COMPETITORS?

During the past 10+ years, Latin American placement agents have played a very signif- icant role in nurturing and helping develop the alternative investment ecosystem in Latin America, serving as a conduit and providing investors with a comprehensive gamut of investment opportunities, not just for alternative investments, but across other asset classes. This is good for investors because it heightens opportunity cost. On the alternatives front (ROAM’s sole focus), our objective has always been to canvass and curate the entire alterna- tives industry, which includes over 4,000 GPs and +14,000 funds, in order to identify the very best risk-adjusted investment opportunities in order to connect Latin American investors with the leading alternative fund managers that sponsors those opportunities. We abide by two guiding principles: quality of managers and rigorous due diligence. Interestingly, many investors think of us more as a consultant than a placement agent. To date, at ROAM we have raised over $5 billion for a select roster of 15 GPs (including 40+ investment funds) among our growing investor network which currently comprises 428 LPs throughout Latin America, and we pride ourselves on working alongside some of the world’s leading alternatives fund managers and providing our Latin American investors with superior risk-adjusted returns. Unlike many of our competitors, we tend to limit ourselves to small number of mandates (4-5 per year), typically specialist firms that are leaders at executing a particular strategy, covering a sector or dominating a market segment and with a few exceptions, we prefer to shy away from generalist GPs that have multiple lines of business. We also have a high-conviction approach and always align ourselves with our GP clients so we can have shared fundraising success over multiple fund cycles. Importantly, we don’t have competing or conflicting mandates, nor our own asset management division, giving our clients priority and a dedicated white glove service throughout. Once we onboard a GO into our platform, it is because we truly believe they are the best at what they do, and we devote ourselves with loyalty to help these clients raise strategic capital in Latin America over multiple fund cycles.

WHAT ARE YOUR EXPECTATIONS FOR ALTERNATIVE INVESTMENT FUNDRAISING IN LATIN AMERICAN IN 2023 AND WHAT TYPE OF NEW CLIENTS ARE YOU LOOKING FOR?

Last year was perhaps the most competitive year in the industry’s history. More than $250 billion of capital was raised globally, with roughly half of that amount concentrated among just 10 managers. There’s clearly been a bifurcation between the haves and the have nots, and Latin American LPs seem to be eagerly rationalising their GP portfolios around high conviction, deeply resourced, specialist firms that have strong Moats, established brands, pattern recognition and longevity of track record. Fortunately, at ROAM we anticipated this trend and managed to build our fund pipeline accordingly, with very high-caliber names that proved to be very strong mandates for us in 2021 and 2022, resulting in aggregate commitments of $1.3+ billion during the last 24 months. The new year always brings renewed dry powder, but 2023 presents some unique challenges which we previously discussed, and which may create a slowdown in terms of aggregate fundraising volumes, including a reduction on the numbers of tickets with some LPs currently solely focused on re-ups. This may quickly change if we see a public market bounceback precipitated by a soft economic landing, but the name of the game continues to be pedigree, investment discipline and performance consistency. In terms of new GP strategies that may be of interest to us, we are currently pretty well covered in technology, growth equity, lower and middle-market buyouts, real estate and venture, but may consider adding something in defensive credit and large buyouts, particularly for groups that have exhibited strong performance with low leverage.