CASE STUDY

Diversified Private Markets

Asian Pension Fund | Spring 2020

Engagement at a glance

Diversified Private Markets Case Study

An Asian institutional investor was seeking to invest US$200 million in a segregated mandate which provided diversified exposure across a range of private markets strategies and assets, including: private equity (>30%), infrastructure (<30%), private credit (<30%) and esoteric strategies (<10%). The objective was to generate substantial yields (target distribution yield 7-9%) as well as relatively high returns (12-14%).

Client-specific Concerns

The objectives for this search represented a challenging combination of yields, total returns, diversification among a wide variety of illiquid asset classes and accelerated deployment (within 24 months). With yields in focus, there was a preference for strategies which could provide a combination of coupons and exit proceeds in the life of the mandate. Other concerns included: a strong preference for senior debt, a desire to use only minimal/moderate leverage, and low exposure to the energy sector. For private equity, venture capital was to be considered on a case-by-case basis in addition to the use of fund and investment level leverage.

Outcome

  • Understanding multi-asset private markets approaches. Investors can consider a wide variety of approaches including customised stand-alone products, segregated mandates and umbrella structures above existing pooled funds. Each product involves varying levels of sophistication and allows for differing levels of manager discretion – it was crucial to develop a clearer understanding of how much discretion the client was comfortable delegating to a manager. Research also focused on developing an understanding of how secondaries and co-investment strategies could help the client to achieve their goals.

  • Modelling the interactions of different asset classes. Considerable time was spent understanding how the very different asset classes within this type of portfolio investment would interact with one another and combine to deliver against the range of objectives and preferences. For example, while a secondaries PE strategy can provide strong short term returns and rapid deployment, a combination of core infrastructure and senior debt can help to provide sufficient yield in the earlier years of the strategy.

  • Shifting priorities. As the impact of the pandemic became clearer through the timeframe of the research, attention moved towards non-traditional secondaries and special situations as a tool to exploit dislocations and opportunities in the market.

  • Scrutinising experience through downturns. Given the impact of COVID-19 on the global economy, a significant amount of time was spent examining each manager’s track record and experience of investing in falling markets. This focused on traditional metrics such as loss ratios, with additional focus on standard deviation and max drawdown for public market equivalents. From a qualitative perspective, it is equally important to understand the lessons that managers have learned from historical underperformance and how this has helped to shape their current approach.

Our specialist says

  • We are seeing a trend among investors seeking a more explicit objectives-based approach to private market investing, which can be addressed by customised multi-asset multi-strategy approaches. This is pushing managers to innovate, find appropriate ways of combining capabilities and approach their clients with more of a ‘solutions’ mindset – which has not historically been the case in the private market asset classes.

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