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2020 Investor Survey: Private Markets Sentiment

January 13, 2020  | by Ralph P. Money

Industry Knowledge | Investment Strategy | Market Commentary | Private Capital

For the third year in a row, Commonfund Capital conducted a year-end annual survey of institutional investors to gauge their sentiment about private market investments. Survey responses totaled 267 investors and consultants, representing 430 organizations and $427 billion in total assets. Following is a summary of the results and implications.


Headline Concerns

Investors’ top concerns were in three areas:

1

Prices are getting frothy (the valuation uptick of purchase price multiples being paid in some sectors);

2

The overall direction of industry fees and terms; and

3

Growth of the industry’s fund sizes (the overall increase in the fund sizes from one fund to the next).

We share these concerns, which help to inform our investment point-of-view and portfolio positioning. We have observed better pricing in the smaller end of the market, and, as a result, our private equity portfolios have a distinct tilt toward small and medium sized-funds that are focused on smaller companies.

Other headline concerns noted by investors included difficulty in finding and accessing top funds, global tensions and upcoming elections.

Performance Potential

Investors again ranked U.S. private equity (small and medium-sized buyout funds) first in terms of performance potential. Investors indicated that they continue to see more robust return potential when working with sector specialists versus generalists and when general partners take a more hands-on approach with their portfolio companies. We agree — and we observe this theme across buyout strategies, venture capital and real assets and sustainability.

Following first-ranked U.S. private equity (small and medium-sized funds), investors rated the performance potential for venture capital, co-investments and private capital in emerging markets as strategies with higher return potential.

Allocation Trends

The year-over-year survey data reflected an overall increase (a continuing trend) in planned allocations to private market strategies. The leading strategies, where investors reported planned allocations would be trending up the most, were to small and medium-sized funds in U.S. private equity (led by sector specialist buyout funds, followed by generalist funds). These were followed by venture capital, co-investments, and secondaries.

Many investors also indicated allocation interest in ESG (Environmental, Social and Governance) and impact strategies, particularly environmental sustainability-themed sectors.

In looking more closely at the upward trend in allocations, we observed four, interrelated characteristics:

  • A growing number of organizations that have recently adjusted upward their target ranges for private capital strategies, as well as investors that are actively in the process of building toward their target allocation ranges;

  • An increased understanding of the need to dollar-cost average over time and not to try to time markets;

  • A distinct and growing interest in finding and accessing sector specialists with more modest fund sizes that target small and medium-sized companies; and

  • The number of investors seeking more attractive returns in the private markets as opposed to the public markets this cycle. It is the point of view of many investors that more active management may contribute not only to returns this cycle but may also serve as a risk management factor to more passive elements of their total portfolio.

Authors

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Ralph Money is Head of the Investor Relations team at Commonfund Capital. He is a member of the investment team, senior product specialist and serves as the team’s lead limited partner contact. Ralph has over 30 years of experience in investments, investor relations, nonprofit financial and general management and institutional banking. Prior to joining Commonfund Capital, he worked with Commonfund Securities, Inc. serving the investment management needs of institutional investors primarily in the northeast. Prior to joining Commonfund, Ralph held various leadership positions within foundation and mission-based organizations including the American Red Cross. His responsibilities included setting strategic directions, financial and investment management, advancement and resource development. Ralph also spent four years at the Chase Manhattan Bank as an officer responsible for covering financial institutions in New England and the Midwest. He has served on the advisory boards of several private capital limited partnerships. He currently serves on the investment committee of the Northfield Mount Hermon School. Ralph has served on the boards of directors of several social sector enterprises and is the former ranking member and chairman of the fire commission in Fairfield, CT, past chairman of the Investment Committee of The Unquowa School and is a former member of the Police and Fire Retirement Board for the Town of Fairfield. He received a B.S. in Business Administration from Georgetown University and has an M.B.A. from Harvard Business School.
Ralph P. Money
Managing Director
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Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

Disclaimer

Information, opinions, or commentary concerning the financial markets, economic conditions, or other topical subject matter are prepared, written, or created prior to printing and do not reflect current, up-to-date, market or economic conditions. Commonfund disclaims any responsibility to update such information, opinions, or commentary. To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated in this material. Forecasts of experts inevitably differ. Views attributed to third parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Managers who may or may not subscribe to the views expressed in this material make investment decisions for funds maintained by Commonfund or its affiliates. The views presented in this material may not be relied upon as an indication of trading intent on behalf of any Commonfund fund, or of any Commonfund manager. Market and investment views of third parties presented in this material do not necessarily reflect the views of Commonfund and Commonfund disclaims any responsibility to present its views on the subjects covered in statements by third parties. Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund fund. Such statements are also not intended as recommendations by any Commonfund entity or employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information. Past performance is not indicative of future results. For more information please refer to Important Disclosures.