Check out our recap of the Alts Seattle event and learn where allocators are shifting their investment strategies now.
Vidrio Financial attended the ALTS Seattle event, (ALTSSEA) October 5-6th and heard from industry thought leaders on a range of issues in the fields of private equity, venture capital, private debt, real estate, hedge funds, cryptocurrency, and other areas of the alternatives investment market. The event was a great opportunity to network and obtain insights on some of the latest investing strategies allocators are looking at for their portfolios.
Some of the key takeaways included insights from Kate El-Hillow, Global Chief Investment Officer, Russell Investments, and how, against the current backdrop of market volatility, investors, now more than ever, are focused on active investing strategies rather than passively allocating in more traditional avenues. As investors seek to mitigate portfolio risks, (another key trend), Kate flagged the level of manager research is on the rise, with the manager selection process becoming longer and stricter as a result. As many allocators have been dealing with significant drawdowns in their portfolios against this market volatility many are seeking to ramp up their diligence processes to validate their manager's holdings and strategies.
Another trend that bubbled up to the surface was the increased focus by allocators transitioning from portfolios that are not ESG compliant to investment vehicles that focus on climate and energy as their active strategy. Since ESG became popular in recent years, many investors have made it a priority to remove investments with higher carbon footprints from their portfolios. Currently, we are beginning to see investors prioritize making investments that are ESG-compliant, giving light to a more intentional investment strategy. This has been a theme we have been increasingly dealing with for our clients, and an area we featured in a blog on the impact of ‘greenwashing’ on investments. The New Direction of ESG for Today’s Allocators.
In general, ESG continues to be front and center for both businesses and investors, with many of the allocators we talk with expressing the need to reposition and rebalance portfolios for longer-term ESG goals as opposed to short-term returns. The issue remains that each client has a different framework that they believe is the right approach to ESG investing but lacks industry-wide standardization. Not only is ESG standardization under review but there are still many questions to be answered on the topic, like what makes up ‘green energy?’
ESG discussion points also made their way to the war in Ukraine. Specifically, if Russia were to cut off natural gas supplies to Western Europe, would that open the door to other alternatives being added to an ESG taxonomy, such as nuclear energy? While Vidrio cannot weigh in on what falls into the green energy debate, we have developed an ESG scoring system to help clients navigate some of these new and emerging ESG issues.
Is Private Market Rebalancing Needed?
If we chart the performance from 2013 until now, we see that private equity has outperformed public equity by 5%. Over time this has caused more allocators to jump on to the private equity ship and reap the performance rewards. However, allocators seem to be favoring a balanced diversification strategy and may look to right the private equity weights that they’ve taken on in recent years due to above-average performance. In this adjustment, the ALTSSEA Private Equity Keynote believed that the secondary markets could prosper in this environment as more funds look to rebalance their portfolios and get back to their maximum allocation exposure to private markets.
However, all of this is not dependent on the secondary markets, as back in September Vidrio saw a prime alternative example appear, with the Investment Board of the Iowa Public Employees’ Retirement System (IPERS). As private equity rose and became larger than what was allowed by the fund’s asset allocation, the investment team took steps to approve an amended allocation plan, essentially increasing the amount of private equity allocation to 17%. At the time, IPERS CEO Greg Samorajski stated, “To avoid rebalancing illiquid assets and potentially diminishing the portfolio’s value, and to ensure vintage year diversification, the Investment Board responded with action that brings the allocations more in line with IPERS’ actual targets.”
One article that nicely summarizes the options available to asset allocators today was posted back in July, by Michael Oliver Weinberg, Adjunct Professor of Economics and Finance, Columbia Business School. In an article, titled, Asset Owners Are Overweight Private Equity (Again), Michael highlighted seven options that allocators have available for managing the outsized performance of private equity. These options range from secondary markets to reallocations and even simply accepting the overweight and current valuations in the hopes that they will eventually trend downwards.
Under the State of the Industry discussion at the ALTS Seattle event, private market investors are also pushing to find managers that provide value rather than just a structural change or passive strategies, again pointing to more of an intentional investment approach. Furthermore, Impact Investing -- an investment made to generate positive, measurable social and environmental impact alongside a financial return – also featured heavily in discussions at the event. The private market keynote panel used this thesis to highlight the fact that “in their minds,” ESG was more passive, or simply a category of investing.
Continuing the private equity track, Vidrio also attended the Private Equity Outlook session that featured Washington Research Foundation, Premera Blue Cross, Andina Family Office, Canterbury Consulting, and Mercer. At the heart of this discussion was why private equity shops have changed over the past few years. The panelists cited a few reasons that this change is occurring:
- There are more private equity managers that are opening their doors to other investors given decreasing investments.
- Due diligence - many investors today are looking for company builders, specifically the actual thesis on what these investment strategies can do and what they can change to create value for a portfolio company.
- Investors finally have enough historical data to look at today. They take a specific view at the teams and experience levels, deep dive into their track records to understand what, why, and how they had success in growing their companies - did they survive through the 2007/2008 financial crisis, the dot.com bubble? Was it growth through excess M&A activities, or something more?
- Metrics - even more important in the future, investors want to know where the puck is going and what companies are going to thrive in the future. Tracking current trends, industries like cybersecurity and healthcare stuck out to the panelists in this regard.
- Finally, they mentioned the secondaries market - as allocators look to rebalance portfolios, they may have to rely on the secondary markets to seal the deal. However, that becomes a question of what people are willing to sell their private equity stakes for today. Given recent growth and performance, many investors are unwilling to sell for a 50% haircut and buyers are seeing the markets and valuations crash and are unwilling to pay a premium.
We would be happy to speak with you about any of the above discussion points, and we encourage you to view the Vidrio Blog for more insights and ideas. We’ll also be at several ALTS events (Dallas, Miami, and Los Angles) in the coming months so be sure to connect with Vidrio onsite.