Intralinks has once again collaborated with Global Fund Media in a survey of limited partners on their satisfaction with recent results and on how they see global investment opportunities near-term.
As to satisfaction: 18% of LPs say that their results from alternative investments have been better than they expected. A sizeable majority (56%) say results have been consistent with their expectations. Another 19% described performance of their investments as “average,” which must be at least slightly disappointing if one is paying for alpha. But this leaves just 7% saying performance fell “below expected return objectives.”
Satisfaction varies with the vehicle. Private equity funds keep their LPs happiest, followed by private debt and real estate funds. Infrastructure and commodities funds have the least happy LPs, with hedge fund investors in a mid-range.
The report quotes Jean Francois Le Ruyet, a partner at a London-based private equity investor, who says that his firm focuses on mid-market PE managers, “and we haven’t decreased our performance objectives from previous years.”
Increasing Allocations
Two thirds of the LPs surveyed say they expect to increase their allocations to alternatives in 2018-19. They were quizzed on the amount by which they would make such an increase. Most (60%) have a small increase in mind from 1% to 5%. But Intralinks found it revealing that one quarter (25%) said they would increase by 10% or more. ‘
Marc Roberts, CIO for a family office, says he will increase that office’s allocation by between 3% and 5%. He also commented, “If you are making an allocation change and trying to address volatility, unless it is an extremely complex investment then a 1% to 3% increase is not going to change your risk/return profile that much.”
Roberts is cautious about PE, planning to “move down the curve toward smaller fund managers.”
That is a theme of the interviews. Although happy with their PE returns, LPs plan to expand into other strategies. In the words of Meghan McAlpine, director of strategy and product marketing at Intralinks, “One concern that has continued” and that helps explain this move into more niche strategies, “is the increasing amount of dry powder outstanding and whether or not GPs can put that capital to work.”
How GPs Are Selected
The report also discusses some of the criteria (aside from strategy) important in the choice of GP. There is, to begin with, the size of a manager as measured by AUM. Investors generally prefer mid-sized managers, those with more than $100 million under management but no more than $1 billion. For the past 12 months approximately 40% of LPs have chosen such managers, and over the next 12 months it appears that again approximately 40% will do so.
Le Ruyet said, “I think it is interesting that a large percentage of respondents said they would prefer to invest in managers between USD100 million and USD1 billion. By contrast, if you look at the reality of the market, investors are flocking to ‘mega funds’, which I think probably track closer to listed equities (than mid-market funds).”
Another criterion: the caliber of the portfolio management team. One (unnamed) LP said that he is “interested not only in the quality of the investment team but also their decision-making process, team dynamics, how they deal with conflicts, what the fee structure is and so on.”
Closely related to this: investors want a track record of multi-cycle performance, so they can assure themselves that the team in question can produce even through downturns, and they want to know about managements operational/IT infrastructure.
But, perhaps surprisingly, LPs don’t assign a very high priority to the cybersecurity policies of a GP.
Direct Investment
The survey also asked LPs about direct investment—both co-investments and segregated managed accounts. A solid majority (58%) of LPs said they were planning on engaging in one or the other of these in the next 12 months. One in four of those said they would focus on core real estate and regional infrastructure.
Ron Barin who for 10 years ending this spring was the VP and Chief Investment Officer for Pension Investments at Alcoa, said he was a little surprised by how many expressed that degree of interest in direct investments. It seems high, he said, but “is perhaps a recognition that the fees they are paying are high and they are probably not getting the performance (to justify those fees).”