Between liquidity concerns, pressure from general partners to allocate capital, and searching for yield, today’s market is a tough one for asset owners.
They aired their worries and highlighted opportunities at Institutional Investor‘s Endowments and Foundations Roundtable in Boston this week. The event runs with Chatham House Rules — it’s off the record — but Institutional Investor can provide some high-level takeaways from the panels and conversations among attendees.
On Biotech
With attractive valuations, high demand, and a strong macroeconomic outlook, the biotech sector remains an allocator darling. But how GPs (and consequently, their limited partners) invest in the sector is changing. Instead of accessing biotech through publicly traded equities or private equity funds, some investors are using private placements.
This structure allows an institution to buy stock via a private offering, often at a more attractive price than the stock is trading at. In April, Korro Bio raised $70 million with the help of Deep Track Capital, Blue Owl, NEA, and Rock Springs Capital. In February, Denali Therapeutics inked a massive $500 million PIPE with the help of “a U.S.-based healthcare-focused investor, with participation from global asset managers based in Boston and on the West Coast.”
On Emerging Markets
As growth in developed equity markets has slowed, some asset owners are turning abroad for yield. But they’re not making the China tech play that was popular three years ago. Instead, geopolitical concerns about China have asset owners racing toward growth companies in India.
Maturing capital markets, digitization, and overall strong economic growth have firms like Goldman Sachs and consultant Bain & Co. heralding the potential of the country. But there are still concerns: In addition to an upcoming election for prime minister, allocators interested in adding India growth to their portfolio will have to contend with overcrowding among investors.
There is a flip side to this trade: For those U.S. investors who can weather the risk presented by investing in China, there is an opportunity to pick up the pieces left behind by their fellow investors.
On Liquidity
Allocators are hyper-focused on managing their liquidity right now. It makes sense — with private equity firms slowing down the pace of deals, distributions are falling behind as well. While this has yet to have a massive impact on portfolios, LPs are waiting for the other shoe to drop.
They’re also having frank conversations with their boards about what it means to hold cash. Is that allocation simply overnight repo agreements? Or does the asset owner count longer-term (or higher risk) fixed income in their cash allocation as well?
Not all asset owners are liquidity constrained though. Some recently launched nonprofits are still putting capital to work, while smaller allocators are taking this opportunity to access private equity managers that may not usually give them an allocation. One LP’s famine is another’s feast.
On NAV Lending and Continuation Funds
Allocators are still complaining about NAV loans and continuation funds — one outright said they wouldn’t work with GPs who used these structures.
Piling leverage on leverage via fund-level revolving credit facilities — that is, taking out a NAV loan — seems to be universally disliked by LPs. While some want distributions more quickly, they don’t want to increase fund-level risk to get their capital back.
Asset owners seem to have a bit more of a nuanced view on continuation funds. While many are taking their capital and running rather than rolling into a new fund, there are a few well-respected LPs that are taking the continuation option.
As one LP put it: They would rather continue to hold onto their manager’s best assets, despite the negatives, rather than sell at a discount.
