Asset owners’ interest in alternative assets just won’t quit.
According to new data from Coller Capital, the number of investors planning to increase their allocation to the asset class is at an all-time high since the financial crisis.
The data, compiled from a survey conducted in February and March of 111 private equity investors from around the world, shows that these investors have a conflicting view of the market.
On one hand, most respondents said they think it is the best time to be making new private equity commitments. On the other, the majority also says that it’s harder than usual to select general partners.
Enter secondaries funds: investments that allow limited partners to access private equity portfolios secondhand. In a secondary deal, an investor can make a new commitment to a proven investment manager, increasing their private equity allocation along the way, should they choose to.
According to the survey, 77 percent of respondents have already put capital to work in the fund type. Half have allocated between 1 and 10 percent of their private equity portfolio to secondaries, while 5 percent have allocated more than 30 percent to the strategy.
Over the next three-to-five-year period, 21 percent of allocators said they plan to increase their exposure to private equity secondary funds, while 15 percent said they’d increase their allocation to other types of alternative secondaries.
“Institutional investors are cognizant about managing their portfolio in the private markets and are using the secondary market as a way to do a couple of things,” said Jared Barlow, partner at Kline Hill Partners, a secondaries fund.
First, according to Barlow, they can use secondaries to add certain private equity strategies — like buyouts or tech-focused funds — to their portfolio without having to deploy new capital. They can also manage vintage year exposure through buying or selling secondary investments, Barlow said.
“There are some long in the tooth investments that are a relative rounding error in their portfolios,” Barlow said. To cope, limited partners may sell off their investments via a secondary vehicle, he added. On the flip side of that, asset owners may want to tap into older investments to avoid the J-curve — the tendency for private equity investments to post negative returns for the first few years before performance improves.
Another benefit to secondaries? Decreasing the number of GP relationships, and thus the complexity of portfolio management.
“Many LPs are shrinking the number of GP relationships,” Barlow said. “What I hear from some sellers and market participants is that they have relatively small teams and monitoring the portfolio has become far-flung.”
But that’s not the only reason they consider more concentrated positions with fewer investment managers. According to Barlow, putting more capital to work in a single manager can help an asset owner achieve “preferred economics,” which may include better fee structures or access to stronger investments. “Concentrating their assets with a GP allows them to become more important to the GP,” Barlow said.