You would call them the smartest guys in the room, had Enron not ruined the term for at least a generation.
The big US endowment funds, those of Yale University and Harvard University in particular, are considered the benchmarks for patient, smart, long-term investment, reflecting the brainpower of the institutions they fund.
What to make, then, of Yale Endowment’s decision to reduce its allocation to private equity?
In September, when the university announced a 12.5% investment return for the endowment in the year ended June 30, it also noted a decline in the target allocation to private equity from the 35.3% level it held in 2012, to 31% for fiscal 2014.
On first glance, that’s not exactly a flight from the sector.31% of an entire fund in private equity is still an enormous amount in comparison to almost any other diversified investment institution, and the figure has risen steadily in recent years from 20.2% in 2008, while allocations to almost everything else – and certainly mainstream equities and other absolute return strategies – have declined sharply.
But there is a sense that the world’s longest-term allocators, the sovereign wealth funds and endowments, have started to think again about the allure of private equity and other alternatives.
Also in September, Jane Mendillo, who is president and CEO of the Harvard Management Company which oversees the $32.7 billion endowment fund there, sent a note complaining that private equity allocations had been underperforming the public equity markets.
“When we invest in private equity, we lock up Harvard’s money for multiple years,” she wrote. “In exchange for that lock-up, we expect to earn returns over time that are in excess of the public markets – an ‘illiquidity premium’.”
This note was not accompanied by any stated intention to reduce exposures – in fact, Harvard has named a new managing director for private equity to try to improve performance – but it does suggest renewed focus on whether alternative asset classes are doing what they should.
A look at the world’s sovereign wealth funds shows that they are so far keeping the faith with private equity, but are showing a clearer delineation between different types of alternative assets, with infrastructure very much in favour, and hedge funds very much not.
Cerulli Associates, the Boston-based research group, recently hosted a sovereign wealth funds presentation by the author in London, which included polling of a group of leading fund managers. (You can read the text here, but to see the data and charts you will need to contact Cerulli directly.)
When asked which asset class was likely to attract the most mandates from sovereign wealth funds in the next 12 months, the bulk, 64%, said alternatives.
But when the question was refined to say which alternatives, 60% went for infrastructure, 40% private equity, and none whatsoever hedge funds, commodities or other alternatives.
Private equity personnel are still very much in demand at powerful emerging sovereign wealth funds. the Korea Investment Corporation recently changed its chief investment officer following the conclusion of Scott Kalb’s term in that role.
Kalb, who has a hedge funds background, was replaced by Dong-ik Lee, with a private equity background.
Major recent hires at the Abu Dhabi Investment Authority, arguably the most powerful sovereign fund of all, have included Colm Lanigan as head of principal investments in private equity, and John McCarthy as global head of infrastructure.
At the new Saudi Arabian sovereign wealth fund, the two most high-profile western hires have been Scott Lanphere, formerly a Morgan Grenfell Private Equity executive (not that his time at Sanabil lasted long), and John Breen, another former private equity specialist.
Generally, momentum towards alternatives is increasing in these funds. Alternatives made up 1.7% of the KIC’s portfolio in 2009, 6.1% in 2012, and Kalb used to talk of a 20% target for the long term.
The China Investment Corporation has gone from 6% in 2009 to 12% in 2011. ADIA can put up to 10% of its funds in hedge funds and managed funds, 10% in real estate, 8% in private equity and 5% in infrastructure.
And Australia’s Future Fund, many of whose earliest hires were in infrastructure and forestry, has an allocation (when last published on March 31) of 15.3% alternatives, 6.5% infrastructure and timberland, 6.8% private equity and 6.4% property.
The Government Investment Corporation of Singapore was another pioneer in alternative allocations. Managers report that many hedge funds have fallen out of favour with sovereign funds through the financial crisis, as too many have simply not done what they were meant to: provide returns in volatile markets in order to counterbalance falling equity returns.
Infrastructure, though, is considered perfect for these investors: long-term, predictable, stable returns. The challenge there, though, is how to access it.
There are very few dedicated infrastructure-specialist fund managers – Australia’s Hastings is a rare example – and to get exposure, sovereign funds are more likely to enter into a co-investment model, or to try to buy something outright.
Thames Water is a classic example of this: in January 2012 the China Investment Corporation bought an 8.68% stake in the holding company that owns the British utility, a month after ADIA bought 9.9% of it from a consortium led by Macquarie.
Years previously, the Qatar Investment Authority had bid for it. So what, in sum, do the smartest minds in the world think?
It appears they still like private equity, but are keeping a close eye on whether they are getting sufficient return for the illiquidity involved; they mistrust hedge funds; and they love infrastructure. It’s up to us as individuals to decide whether we want to follow suit.
forbes.com
The big US endowment funds, those of Yale University and Harvard University in particular, are considered the benchmarks for patient, smart, long-term investment, reflecting the brainpower of the institutions they fund.
What to make, then, of Yale Endowment’s decision to reduce its allocation to private equity?
In September, when the university announced a 12.5% investment return for the endowment in the year ended June 30, it also noted a decline in the target allocation to private equity from the 35.3% level it held in 2012, to 31% for fiscal 2014.
On first glance, that’s not exactly a flight from the sector.31% of an entire fund in private equity is still an enormous amount in comparison to almost any other diversified investment institution, and the figure has risen steadily in recent years from 20.2% in 2008, while allocations to almost everything else – and certainly mainstream equities and other absolute return strategies – have declined sharply.
But there is a sense that the world’s longest-term allocators, the sovereign wealth funds and endowments, have started to think again about the allure of private equity and other alternatives.
Also in September, Jane Mendillo, who is president and CEO of the Harvard Management Company which oversees the $32.7 billion endowment fund there, sent a note complaining that private equity allocations had been underperforming the public equity markets.
“When we invest in private equity, we lock up Harvard’s money for multiple years,” she wrote. “In exchange for that lock-up, we expect to earn returns over time that are in excess of the public markets – an ‘illiquidity premium’.”
This note was not accompanied by any stated intention to reduce exposures – in fact, Harvard has named a new managing director for private equity to try to improve performance – but it does suggest renewed focus on whether alternative asset classes are doing what they should.
A look at the world’s sovereign wealth funds shows that they are so far keeping the faith with private equity, but are showing a clearer delineation between different types of alternative assets, with infrastructure very much in favour, and hedge funds very much not.
Cerulli Associates, the Boston-based research group, recently hosted a sovereign wealth funds presentation by the author in London, which included polling of a group of leading fund managers. (You can read the text here, but to see the data and charts you will need to contact Cerulli directly.)
When asked which asset class was likely to attract the most mandates from sovereign wealth funds in the next 12 months, the bulk, 64%, said alternatives.
But when the question was refined to say which alternatives, 60% went for infrastructure, 40% private equity, and none whatsoever hedge funds, commodities or other alternatives.
Private equity personnel are still very much in demand at powerful emerging sovereign wealth funds. the Korea Investment Corporation recently changed its chief investment officer following the conclusion of Scott Kalb’s term in that role.
Kalb, who has a hedge funds background, was replaced by Dong-ik Lee, with a private equity background.
Major recent hires at the Abu Dhabi Investment Authority, arguably the most powerful sovereign fund of all, have included Colm Lanigan as head of principal investments in private equity, and John McCarthy as global head of infrastructure.
At the new Saudi Arabian sovereign wealth fund, the two most high-profile western hires have been Scott Lanphere, formerly a Morgan Grenfell Private Equity executive (not that his time at Sanabil lasted long), and John Breen, another former private equity specialist.
Generally, momentum towards alternatives is increasing in these funds. Alternatives made up 1.7% of the KIC’s portfolio in 2009, 6.1% in 2012, and Kalb used to talk of a 20% target for the long term.
The China Investment Corporation has gone from 6% in 2009 to 12% in 2011. ADIA can put up to 10% of its funds in hedge funds and managed funds, 10% in real estate, 8% in private equity and 5% in infrastructure.
And Australia’s Future Fund, many of whose earliest hires were in infrastructure and forestry, has an allocation (when last published on March 31) of 15.3% alternatives, 6.5% infrastructure and timberland, 6.8% private equity and 6.4% property.
The Government Investment Corporation of Singapore was another pioneer in alternative allocations. Managers report that many hedge funds have fallen out of favour with sovereign funds through the financial crisis, as too many have simply not done what they were meant to: provide returns in volatile markets in order to counterbalance falling equity returns.
Infrastructure, though, is considered perfect for these investors: long-term, predictable, stable returns. The challenge there, though, is how to access it.
There are very few dedicated infrastructure-specialist fund managers – Australia’s Hastings is a rare example – and to get exposure, sovereign funds are more likely to enter into a co-investment model, or to try to buy something outright.
Thames Water is a classic example of this: in January 2012 the China Investment Corporation bought an 8.68% stake in the holding company that owns the British utility, a month after ADIA bought 9.9% of it from a consortium led by Macquarie.
Years previously, the Qatar Investment Authority had bid for it. So what, in sum, do the smartest minds in the world think?
It appears they still like private equity, but are keeping a close eye on whether they are getting sufficient return for the illiquidity involved; they mistrust hedge funds; and they love infrastructure. It’s up to us as individuals to decide whether we want to follow suit.
forbes.com
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