As market losses pile up, there’s bad news for first-time fundraisers: some allocators say they won’t put new money to work in inaugural funds.
The chill comes after years of allocators being more open than ever to emerging managers, alternative metrics to judge the potential of new firms, and new investment ideas, particularly in private markets. But the tides are turning for asset owners who say that while they are not checked out completely, they are keen to remain on the sidelines.
“We’re definitely focused on re-up strategies,” said Adam Cloud, Treasurer for the City of Hartford, Connecticut, speaking at the Context 365 conference in New York on Tuesday. “We’re putting the brakes on new concepts. We’ve got to put a lot more cash on the sidelines.”
Cloud spoke on a panel alongside Ahmad Ali, managing director at the Presbyterian Church Pension plan, Michael Oliver Weinberg of CMT Portfolio Advisors, and moderator Steve Novakovic from the CAIA Association.
The conference coincided with the S&P 500’s and NASDAQ’s slide into bear markets on Monday. The panelists — primarily allocators addressing what to expect in the second half of 2022 — expressed worry over the market’s move, inflation, rising interest rates, and high private market valuations.
“I’m deeply worried about inflation,” Cloud said. He added, there may be a bright side. “For the first time in seven years, though, we may pick up some income from our fixed income portfolio.”
Cloud noted that while the Hartford Municipal Employees Retirement Fund is willing to look at “solid, established” investment managers, first-time funds are “certainly not” something they’re looking at right now.
Ali had similar thoughts. While the Presbyterian Church Pension plan is willing to consider spinouts, other funds may not get a look now. “Someone we don’t know, it’s not something we’ll do right now,” Ali said.
He added that the pace at which the pension plan was putting capital to work has slowed. “We’ve told many GPs that if you’re not in our budget for 2022, we’ll talk to you in 2023,” Ali said.
The cautious attitude doesn’t just apply to managers’ first fundraises. Weinberg noted that a lot of private investment managers that raised their first fund only a year or two ago are already back in the market raising a second vehicle.
“It’s not attractive to us,” Weinberg said. Cloud agreed. “There may be people who spun out of major funds, hung up a shingle and said, ‘I’m a private credit guy now,’” he said. “But we have to see what happens to them when the tide goes out.”
Despite their hesitancy to invest right now, the allocators see opportunities for investors that have capital to deploy.
According to Weinberg, macro hedge funds, managed futures funds, long-short biotech strategies, distressed investments, relative value funds, and healthcare royalties are all attractive investments. “If one has capital today, there’s so much to do,” he said.
Another area that he would consider is secondary funds. “Everyone’s got the denominator effect,” Weinberg said. “Everyone is overcommitted.” In other words, asset owners whose public equity investments have dropped in value are now over-allocated to private investments. During times like these, they may need to sell.
“You’re going to have people who are forced to do things now that they wouldn’t otherwise,” Ali said.