Private markets LPs see ‘retailisation’ of alternative assets as risk to returns

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Nick Evans writes that nearly two-thirds of existing limited partner (LP) investors in private equity funds believe that the introduction of new sources of retail and non-institutional capital into private markets will adversely impact their future returns from alternative assets, according to the latest edition of Coller Capital’s twice-yearly Global Private Equity Barometer.

The finding comes as leading players in the global private market assets industry are gearing up to take advantage of a potentially massive influx of new money into the space through the retailisation of an investment area that has so far been restricted almost exclusively to institutions and ultra-wealthy investors.


Participants believe that regulatory relaxations allowing new retail-targeted products to provide individual investors and savers with greater access to private equity, private debt, real estate, infrastructure, and other alternative assets will inject a significant growth stimulus into the industry from the creation of new wealth capital-raising channels.


Top general partner (GP) firms such as Blackstone, KKR, and Apollo are expecting the inflow of tens of billions of dollars in additional funds under management over the next few years from these new capital-raising sources, and are ramping up their activities and product offerings in the wealth management arena in anticipation of the new ‘democratisation of alternatives’ wave.


Speaking at the recent Milken Institute Global Conference in Los Angeles, Blackstone Alternative Asset Management global head Joe Dowling said the retailisation of alternatives was a major long-term phenomenon that was only “very early innings” – while Julian Salisbury, global head of Goldman Sachs Asset Management, said the democratisation of allowing access to alternatives for a much wider base of investors was “a real mega-trend”.


However, the Coller snapshot indicates that LPs are not so keen on the idea – with 62 per cent of the investors surveyed believing that non-institutional sources of PE fund capital, such as retail investors or insurance premiums, will present a long-term risk to institutional investors’ private market returns, although only 30 per cent of LPs believe that these alternative sources of capital will create risks in terms of existing investors’ fund access.


The barometer, which leading private market assets secondaries group Coller Capital has been undertaking since 2004, provides a twice-yearly snapshot of worldwide trends in private equity – based on the opinions of 110 leading LPs based in North America, Europe, the Middle East, and Asia-Pacific.


In the latest Summer 2022 edition, LPs were surveyed for their views on a diverse range of issues including: private equity versus public equity portfolio performance; expected future returns and allocations; the role of ESG as a value driver; reputational risks arising from activist and media campaigns; the outlook for private credit amid rising interest rates; and exposure to cryptocurrencies and the metaverse.


On performance, more than 70 per cent of LPs report that their private equity portfolios have outperformed their public equity holdings since the global financial crisis (GFC) – with only 14 per cent reporting the opposite.


Indeed, the poll shows that private equity returns are at near-record levels. More than 40 per cent of investors reported net annual returns of more than 16 per cent across the lifetime of their private equity portfolios – a figure only exceeded once before in the history of the barometer, in the summer of 2007 leading up to the GFC – while most LPs would achieve their private equity return targets if all their funds achieved only the median performance for their fund cohort in their respective vintage years.


In terms of allocations over the next 12 months, half of LPs plan to increase their overall target allocations to alternative assets – as opposed to only 5 per cent of LPs who plan to reduce their alternative asset allocations.


Infrastructure, real estate, private equity, and private credit all saw significant proportions of LPs planning to increase their target allocations in the next year – while the only area where LPs see reductions is hedge funds, with 40 per cent saying they intended to reduce target allocations over the next 12 months, versus only 14 per cent who plan to increase allocations.


Furthermore, as regards private equity specifically, more than 50 per cent of investors have increased their target allocations to private equity over the past two years, with only 10 per cent reducing their allocations.


On ESG, meanwhile, two-thirds of LPs worldwide believe that ESG adds value in private equity investing – both through effecting proactive, positive change to portfolio companies, and also through the exclusion of high-risk investments and business practices.


“ESG’s positive impact at the individual company level is a reflection of private equity’s unique hands-on management model,” said Jeremy Coller, chief investment officer of Coller Capital. “The managers of private equity funds hold the levers of change for the companies they invest in, in a way that the managers of public equity funds do not.”


Interestingly, though, the survey indicates that more than half of publicly exposed LPs such as public pension plans, endowments and foundations perceive a growing risk to their reputations from commentators or activists focused on LP links to PE-owned businesses.


Some 62 per cent of public pension plan LPs, and 56 per cent of endowment and foundation LPs, see a perceived risk of reputational damage – while other types of investors, who see themselves as less publicly exposed, are less concerned.


As for crypto, almost a third of LPs currently have commitments to PE or VC funds targeting investment in crypto-enabling businesses – while a further 13 per cent expect to make such commitments in the next few years – but the majority (57 per cent) have no plans to do so.


An even bigger majority, of more than 80 per cent, do not see themselves ever making commitments to PE/VC funds that invest using cryptocurrencies – including 44 per cent that have made a policy decision to exclude cryptocurrency investing. Just 14 per cent of the LPs have made commitments to funds that invest using cryptocurrencies and only another 5 per cent expect to do so in the next few years.


Investors seem similarly lukewarm with regards to seeking exposure to the metaverse. Some 17 per cent of LPs currently have commitments to funds that target investment in services and goods for the metaverse – while a further 17 per cent say they are likely to do so in the next years. But 66 per cent have not made any such commitments and have no plans to do so.


With respect to the fast-growing private debt market, one third of LPs based in North America expect significantly higher default rates in their private credit portfolios as a result of rising interest rates, with 25 per cent of Asia-Pacific LPs and 20 per cent of European GPs expecting higher default rates.


Interest in private debt is more geared towards developed markets. More than half of investors see attractive opportunities in private credit funds targeting North America and Europe in the next two years, while only a third see attractive opportunities for Asia-Pacific-focused funds.


Furthermore, some churn has been seen in investors’ private credit allocations – with 35 per cent of LPs increasing their target allocations, and 19 per cent decreasing them, over the last two years.

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