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The 'Practical Challenges' Of Co-Investments | Al Hemmingsen, Parkland Management CIO | Exclusive Q&A, Part 2

by trusted insight posted 8months ago 1866 views

Al Hemmingsen is chief investment officer at Parkland Management Company, a single-family investment office based in Cleveland, Ohio. In part two of this interview, Hemmingsen talks about the Parkland portfolio and the strategic approaches that he's looking to implement; the challenges associated with co-investments; and why the family office space is changing rapidly.

In part one of this interview, Hemmingsen talks about having institutional investment advantages, why Parkland is less focused on direct investments and why investors should be skeptical of "conventional wisdom." You can find part one here. 

Hemmingsen was recently named as one of Trusted Insight’s 2017 Top 30 Family Office Chief Investment Officers. He graciously spoke with Trusted Insight on Oct. 31, 2017. The following interview has been edited and condensed for clarity.

Trusted Insight: You took over Parkland nearly a year ago. What portfolio did you inherit, and in what ways is it evolving?

Al Hemmingsen: At a high level you can think of it as endowment like. It's overwhelming an equity orientation. We have a mix of listed equity, but we also have a long-standing private equity program, and a direct hedge fund program.

The family has been pretty thoughtful about how they were going to approach investment strategy in general. The strategies we have are pretty sensible. We indexed U.S. large cap equities and did it at least fifteen years ago, well before a lot of other people were really talking about it and thinking about it.
 

"Co-investments don’t solve the real problems for private equity investors, and the data is mixed on their actual outcomes."


We've done the occasional co-investment, but we've been pretty targeted about it. So there isn't a huge amount of things we have to work out. We're not working out companies or doing takeover type stuff. It's pretty manageable. It's been pretty thoughtfully put together.

The changes that I would be looking to make are incremental. Things like how to position the equity portfolio going forward just given how different regions of the world have done and how the U.S. dollar's done. A similar exercise in private equity. Where do we want to emphasize advantages or perhaps de-emphasize certain sectors or areas? How do we get more diversification out of our hedge fund portfolio? Those are some of the strategic issues we're looking at.

Trusted Insight: To what degree are direct and co-investments an area of focus?

Al Hemmingsen: I actually don’t think that highly of co-investments. In my view, they’re a poster child for how the industry sometimes gets to weird solutions to problems. Co-investments don’t solve the real problems for private equity investors, and the data is mixed on their actual outcomes.

Realistically, it'll be an area where our activity is limited for the foreseeable future. If we do it, it’s targeted.

There are a couple of practical challenges going down that path. You have to be staffed in the right way to be able to do it. There also some interesting governance or workout-type questions especially that I wonder about with some of these club deals or different transactions that you see.
 

"You’re not just investing into a company or an asset for 10 years, you’re also picking your investment partners for at least that time frame as well."


It strikes me like many marriages: everything sounds fine going in, and you think it'll work out and be great forever. But if you’re part of a group of two, three, four families that made an investment and then a few years down the road it needs more capital, or it has some workout type of issue that needs to be addressed, or it needs to be restructured. You have different opinions in the room, and I can see that being its own challenge, in terms of being able to effectively manage those issues.

I can really only speak to our experience and our reservations on it. You have to be really thoughtful about how you select your partners going into deals. You’re not just investing into a company or an asset for 10 years, you’re also picking your investment partners for at least that time frame as well.

Trusted Insight: To your point about the flexibility of family offices, family offices seem to lead the industry in pioneering new strategies, which are often later adopted by other institution types. In what other ways are family offices changing how institutions invest?

Al Hemmingsen: Historically, they've been the leader for new types of investment strategies or new funds. They have the ability to see things and go in early and don't have some of the other governance considerations that other investor types have. Family offices usually act first, and then endowments and foundations next and then later groups like public pensions will come in later after something has been well established and has longer presentable record.

In terms of how they're changing, the prevalence of club deals is interesting. It has a potential to create an interesting dynamic where you’re disintermediating private equity funds, and in a sense becoming competitors with them at some level. We've seen where that went with how investors disintermediated hedge fund of funds and investors became competitors with them in some ways. 

Trusted Insight: What else should readers know about you, Parkland or family offices in general?

Al Hemmingsen: One thing I have observed, being a relative newcomer to the family office space, is that the family office industry is changing and professionalizing rapidly. That adds to the competition, but it also adds to the set of interesting places that you can work.

I’m probably like many people in that I’ve become very rooted in one place. I grew up in the country. My family’s here, kids and extended family. We have land here. I can see the stars at night. We can hunt and grow things. The financial world always wants people to move to New York, San Francisco or London. There are a few endowments in small towns, and some foundations. There are also many family offices out there for people who want that sort of lifestyle, but also want to do interesting investment work.

You can view our full library of Q&As here