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Structured leeway

AIG's global private equity business is a success story with many overlapping and complex chapters. By Rob Kotecki

Unlike most funds operating under the auspices of a larger corporate entity, AIG's private equity activities have been marked by evidence of aggressive growth into new regions and asset classes. There's been a willingness to take risks that would jibe with Lou Gerstner's challenge, ?Who says elephants can't dance??

But with all the willingness to experiment, and the success of such gambles, how does AIG administer so wide and varied a portfolio, and furthermore, identify the cross currents to be spun into unexpected opportunities? The recent past offers too many examples of conglomerates that thought size alone would sustain them.

AIG's private equity dealings date back to before the asset class had a name. In the 1960s, AIG was providing capital and investment advice to family owned businesses in Asia, as a natural outgrowth of their deep roots in the region, reaching back to its founding in Shanghai in 1919. From there, the Company's investment activities blossomed into backing private equity funds by 1980, launching direct investment teams in China and the U.S. by the mid-1980s, and managing a fund of funds by 1988.

As AIG kept diversifying into hedge funds, real estate and other alternatives, you'd think the company would have structured the array of assets under the aegis of a single brand. In fact, they didn't. Each investment activity prospered independently, until 1996, when the AIG Global Investment Group (AIGGIG) was formed, consolidating the institutional asset management activities of the insurer. In its short history, AIGGIG has grown both organically and by acquisition, from $75 billion in assets under management in 1996 to more than $638 billion today, including $18 billion in private equity.

The numbers are compelling, but what exactly are the ?synergies? of operating as a single entity? Without concrete processes it's impossible to quantify what, if any, those synergies mean for the bottom line. Solidify those processes too much, and the dreaded ?meeting for a meeting's sake? starts to crowd executives' calendars. If the balance between too much structure and too little was easy to strike, it wouldn't be a cliché.

Questions of structure are particularly pertinent for AIGGIG's private equity businesses given that the unit recently emerged from a period of uncertainty. In February of this year, AIGGIG settled a lawsuit with the two former heads of its private equity business, Peter Yu and William Jarosz. The company charged the two executives with violating their non-compete clause by launching the Cartesian Group, an emerging market focused fund, after the pair was fired in April of 2005. In the wake of their termination, some market observers voiced doubts about the future of the operation. Yet regardless of how minor the executive shake-up proved to be, the turnover was credited as one of the factors behind LPs withdrawing their commitments to AIGGIG's Global Emerging Markets Fund II (GEM II), resulting in the equity pool being slashed by 70 percent.

The waters have since calmed around both AIGGIG and its private equity business, with their latest co-investment fund closing oversubscribed at $700 million, after an initial target of $500 million. AIGGIG's global private equity and hedge fund activities are now under the leadership of Robert Thompson, serving as Head of Alternative Investments. Thompson was formerly a GE Capital executive and founding partner of the health care investment firm, Ferrer Freeman.

Today's AIGGIG remains a complex web of operations organized into five broad groups; public equity, fixed income, hedge funds, real estate and private equity. Under the private equity banner, Thompson divides the various activities into fund of funds, non-lead investments, developed markets- direct investments and emerging markets-direct investments. The fund of funds group includes both primary funds and secondaries, while non-lead investments incorporate co-investments, and mezzanine in both europe and the US. direct investments in developed markets include niche funds for infrastructure and healthcare, European buyouts and Japanese transactions. Direct Investments in emerging markets are split in four, defined as Asia, Central and Eastern Europe, Latin America and ?other emerging markets.? The actual funds (see accompanying chart) don't correspond to these divisions. In many ways, the private equity business operates like it began in 1960s, initiated organically from the current slate of activities, not by the strategic directive of the home of-fice. It may be approved there, but the opportunities are sourced closer to a given geography or industry. AIGGIG tailors its commitments according to the intelligence built from its executives spread over six continents.

Asia hands
AIGGIG's global reach, most notably those deep roots in Asia, has fostered the types of proprietary relationships considered priceless to those venturing in the region for the first time. ?The region first began to heat up for global private equity during the financial crisis in the mid-90s, when it was viewed as a distressed asset opportunity,? says Ada Tse, president and CEO of AIGGIG's Asia operations. ?But given our history in Asia, we're seen as long term partners, not merely vultures for valuation gaps.?

The AIG brand has long since transcended the reputation of marauding Westerners, so local relationships yield quality intelligence on industries and political/regulatory issues. The managers on the ground in such emerging markets then develop ideas for new funds or deals, or the viability for follow-up funds. These ideas are then vetted by a small investment committee, consisting of the most senior managers of AIGGIG. ?Meetings with the investment committee test local conclusions against more global developments, allowing the perspective to shift from the trees to the forest and back again,? says Steve Costabile, Head of the private equity funds group, who sits on the committee.

Most of the funds dedicated to direct investments in emerging markets typically begin as generalists that develop niche areas over the life of the fund, as relationships in a given sector deepen through deal activity. For its direct investments in more developed regions, such as the US, the AIG funds are more niche-oriented from the start, to sidestep conflicts of interest with the fund-of-funds business. In Asia, the deal flow tends to bloom from long standing relationships, so the region is rarely a place for competition between AIGGIG the limited partner, and AIGGIG the general partner, according to Tse.

While the investment committee oversees such broad strategic parameters, AIG prides itself on allowing for a high degree of autonomy for deal sourcing and new business possibilities among their individual funds. This independence would account for the patchwork design of the group, stretching to include everything from direct investments to mezzanine and secondaries. Costabile argues: ?Our diversity of business lines allows for an attractive spread of risk, and grants us maximum flexibility to take advantage of any number of market observations, whether that's noting a dearth of mezzanine within a given deal size or a region, or an industry in Japan looking to consolidate.?

Thompson reiterates that the ?synergies? of the AIG umbrella do indeed make the whole greater than the sum of its parts.

?We not only give our funds a great deal of leeway when it comes to growing and experimenting, but we also offer no small amount of support,? says Thompson. ?There's a close collaboration among the various lines of business within private equity, so that our fund of funds group would be studying one team, and call up someone at our mezzanine group who worked with that firm on a deal three months earlier. Suddenly you're not relying on their PPM or your own data mining, but first person references.?

Senior management considers one of its chief responsibilities to serve as the connective tissue among the various groups. Thompson explains, ?By placing the oversight of so many funds in the hands of our investment committee we're able to take a step back and define some novel ways they can work together.?

As a result, the larger organization serves as an intelligence resource for the smaller units, not just a reliable provider of capital, though that role can't be disregarded. ?We were looking at a particular secondaries portfolio and our ability to tap the broader AIG organization as a co-investor granted us the credibility to secure the transaction,? notes Costabile.

Another substantial resource that AIGGIG offers the funds is its ?brainpools? program. The ?brainpools? are research teams organized around industry categories that make available resources to anyone in AIGGIG. Brainpools allow analysts and portfolio managers in all asset classes from high grade and high yield fixed income to private and listed equities around the world to understand important issues that may affect future investment decisions. However, there remains a separation between the publicly listed and private equity teams, and only sector-related issues are discussed and analyzed, not specific companies in the private sector.

AIGGIG devotes the brainpool program to four particular sectors that require a high level of technical expertise: natural resources, energy, healthcare, and telecommunications/ technology. These four sectors are analyzed in a global framework with contributions from regional sector analysts. The purpose of these teams is to create in-house research that identifies emerging global trends. Formal meetings for the Brainpools take place at least quarterly, but the team members continuously interact with each other to insure that regional insights quickly become shared knowledge across the business.

Brainpools are a luxury that most standalone firms wouldn't have been able to sustain a few years ago. Today that may not be the case. With Blackstone's many business lines and $20 billion private equity fund, AIGGIG's access to vast resources seems less unique among firms. What may keep AIGGIG competitive is its ability to capitalize on its proprietary relationships around the globe and its increasingly systematized division interactions. Its use of senior management as ?connective tissue? is one way AIGGIG has begun to do just that. Brainpools may also prove a viable model, not just to share research findings, but to link relationships that took decades to build. In the future, a diversity of offerings has to provide more than a spread of risk in the future. It has to provide a unique and competitive portfolio of relationships, the kind that gave rise to AIG's private equity business decades ago.

DEVELOPED MARKETS

FUND NAME FINAL CLOSE
1 AIG PineStar Capital, L.P. 2005
2 AIG MezzVest II, L.P. 2005
4 AIG Co-Investment Fund L.P. 2005
5 AIG Highstar Capital II L.P. 2004
6 AIG Private Equity Portfolio III (?PEP III?) 2004
7 AIG Altaris Healthcare Partners 2004
8 AIG-MezzVest, L. P. 2003
9 AIG Highstar Capital L. P. 2002
10 AIG Private Equity Portfolio II (?PEP II?) 2001
11 AIG Horizon Partners Fund L. P. (&#42) 2000
12 AIG Private Equity Portfolio (?PEP?) 2000
13 CapVest Equity L.P. 2000
14 AIG Private Equity Portfolio (?APEP?) 1999
Total Capital Committed to Developed Markets $5,601,000,000
AIG GIG (ASIA) FUND NAME FINAL CLOSE 15 AIG Japan Opportunity Fund 2001 16 AIG Asian Opportunity Fund, L.P. (?AOF?) 1998 17 AIG Indian Sectoral Equity Fund 1997 18 AIG Asia Direct Investment Fund 1996 19 China Retail Fund 1996 Total Capital Committed to AIGGIG (Asia) $1,140,200,000

AIG CAPITAL PARTNERS

FUND NAME FINAL CLOSE
20 AIG Global Emerging Markets Fund II, L.L.C. 2005
21 AIG-Interros Russian Century Fund, L.P. 2003
22 AIG Blue Voyage Fund 2001
23 AIG Brazil Special Situations Fund, L.P. 2001
24 AIG Global Sports & Entertainment Fund 2000
25 AIG Orion Fund, L.P. 2000
26 AIG Southern Cone Fund, L.P. 1999
27 AIG New Europe Fund, L.P. 1999
28 AIG Silk Road Fund, Limited 1998
29 AIG Global Emerging Markets Fund, L.L.C. (?GEM?) (&#42&#42) 1998
30 AIG-Brunswick Millennium Fund Partners A, L.P 1996
31 AIG Latin America Equity Partners 1995
Total Capital Committed to AIG Capital Partners $2,029,000,000

INTERNATIONAL INFRASTRUCTURE

FUND NAME FINAL CLOSE
32 AIG African Infrastructure Fund 2001
33 AIG Emerging Europe Infrastructure Fund 2000
34 AIG Asian Infrastructure Fund II, L.P. 1997
35 AIG-GE Capital Latin American Infrastructure Fund, L.P. 1997
36 AIG Asian Infrastructure Fund, L.P. 1994
Total capital committed to international infrastructure $4,503,000,000

AIG Global Investment Group
Head Office: New York

Additional offices:

Africa (2), Asia (12), Australia (1), Europe (15), South America (3), North America (10 beyond NY)

Year of Inception: 1996

Target Geographies: Global

Number of investment professionals:

More than 1,800 total employees, 450+ investment professionals, 200+ private equity professionals

Senior management team:

Win J. Neuger, CFA, Chairman and Chief

Executive Officer

Robert T. Thompson, Senior Managing

Director, Head of Alternative

Investments

Total assets under management:

US $638.1 billion as of 30 September 2006

Capital invested since inception:

38 sponsored private equity funds with US $14.2 billion in total commitments