I’m in flow with and always eager to speak to insightful, pedigreed general partners that are raising their second, third or later fund (the occasional first-time fund), operating across the investment strategy spectrum. I love the perspective that such engagement provides.
Lately in the private funds space, my firm Ancram IRBD is most inclined to raise products that focus on sector-specific buyout, private credit, venture debt, real assets or possibly global macro strategies designed to capture volatility, as these strategies are seeing increasing demand. The managers I work with know that the markets are tough, and have generally adjusted their inflow expectations according to the strategy (or the size of their firm), or are in some cases rushing to get more capital in the door before investors tighten their belts (and purse strings) further in light of current market conditions.
But in this essay, I want to focus the reader’s attention on what investors have to say.
According to Preqin, from 2015 to the end of 2021, AUM across all alternative asset classes increased at a CAGR of 10.7%. As of the end of 2015, AUM stood at $7.23 trillion, rising to $13.32 trillion by the end of 2021 and they expect AUM growth to accelerate to 11.7% and reach $23 trillion in 2026, largely driven by demand for private equity, hedge funds and private credit offerings.
Despite recent market turmoil, many investors are very busy with a rigorous re-up cycle, echoing these growth projections by Preqin. LPs continue to look for quality products to fit specific portfolio requirements, run by experienced managers who know how to ride the waves of volatile cycles. Some LPs have lamented how quickly managers are coming back to market with new products after the most recent fund raise, while others are all too happy to vote again for the manager they’ve diligenced and met with multiple times already, including pre-COVID. In a few limited cases, investors have spoken about how they will have to choose between re-up opportunities and they have no room for new manager consideration given this. Of course, bigger more established institutional-grade managers are still raising a larger percentage of monies being allocated, as has been the case for a number of years now.
The second quarter of this year and really all of 2022 in general is marked by headline volatility in the equity and crypto markets and rising interest rates and inverted yield curves. Volatility also presents opportunity and there are always winners that emerge as the markets shift gears, in this case, out of the easy cash environment that has defined them for so many years now. That said, not all investors are inclined to jump in with grand gestures when the VIX is making headlines.
Of course, investors are varied in terms of the types of exposures they are looking for, but given recent market changes, more are angling toward greater real assets exposure, with some getting even more serious about classic credit analysis. Real asset managers are talking about sharp historic inflows. Others are reviewing portfolio exposures and standard targets for revision as the classic 60/40 portfolio is under pressure. Some LPs are watching to see what happens next, as interest rates will quite likely rise again and the macro environment contains many factors that could present further shifts in the markets, including the ground war in Europe, social unrest here in the U.S., etc. Uncertainty translates to a ‘wait and see’ attitude for many.
While floating rate credit exposure doesn’t always reflect the highest quality underlying borrower, short term floating rate AAA/institutional grade exposure is in vogue, to account for further anticipated hikes.
As expected, a number of institutional LPs are starting to look more seriously at ESG related strategies and metrics, and there is quite a lot of interest in supply chain deals at the moment.
As things open up and people are more readily available for in-person engagement, I’m finding that investors are still largely inclined to conduct first and second meetings virtually before determining if in-person engagement is the right next step. Jumping on a plane for a string of first LP meetings isn’t as prevalent as it was before.
Some investors are talking about a record number of solicitations in their inboxes, as there are more private fund product options than ever before and outreach data is more broadly available, so long-standing relationships are important if you want a product to be considered.
While there are many time saving forward looking platforms and technologies like Eleven and Harmonate, that streamline the investor/manager engagement process or use AI to automate the subscription document processes, some investors want to stay with tried and true methods due to cybersecurity concerns. My informal discussions suggest that the LP community is split about 50/50 between utilizing tech innovations to streamline classic processes and sticking with traditional methods.
The bright spot in all of this is renewed in-person conference engagement, The InvestOps and FRA conferences that I spoke at earlier this year were packed with people who couldn’t be more pleased to shuck off Zoom engagement for a few days and mingle and learn from industry practitioners the old-fashioned way.