Markets Group: Investing in Private Equity in '23 Could Prove Challenging to Over-Allocated Institutions
NEPC’s Josh Beers was quoted in a recent Markets Group article to discuss the importance of vintage year diversification. View the article on the Markets Group site here.
Institutional investors should be eager to deploy capital into private equity in 2023. The asset class, after all, capitalized on the economic downturns at the start of the century and during the Great Financial Crisis to produce stellar returns.
Speaking to the investment committee of the Pennsylvania Public School Employees’ Retirement System (PSERS), Corina Sylvia English, a principal with consultant Hamilton Lane, said, “the data shows the best time to invest in the asset class is right now. You are buying into a business at a low point – that is a value driver for operational focus.”
Scott Nuttall, co-CEO of KKR, concurred. Speaking on the investment firm’s third quarter earnings call, he said that “in an environment like this, companies still need capital. And we find private capital tends to have less competition at a time like this. Public markets are more difficult. Corporate M&A is more challenged. So, we’ve got a lot of capital to put to work. Companies still need it.”
But numerous institutional investors – particularly public pension funds – may need to overcome challenges to be highly active private equity investors in the coming year. These includes being overallocated to the asset class, a reduction in distributions and fund stakes selling at a discount in the secondary market. Industry observers, though, say that it is a necessity for investors to continue investing in the asset class and maintain exposure to the 2023 vintage year.
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Josh Beers, a principal and head of private equity for NEPC, said institutional investors need to continue deploying capital into the private equity sector to ensure vintage year “diversification” within their portfolio. “It’s super important,” he said. “You can go through business cycles where there are some great opportunities and other cycles that are not great.” General partners, he said, on average take three years to deploy capital – a period in “which a lot can happen.”
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Pensions & Investments: Plan Sponsors - Navigating Uncertain Times Takes Careful Investing and Communication
NEPC’s Thomas Cook was quoted in a recent Pensions & Investments article highlighting key takeaways from the Defined Contribution West conference earlier this month. View the article on Pensions & Investments’ site here.
In an age of uncertainty, plan sponsors should continue to focus on protecting participants’ savings through making careful investing decisions and maintaining strong communication tactics.
That was one of the overarching themes at Pensions & Investments’ Defined Contribution West conference Oct. 23-25 in Carlsbad, Calif., as industry experts discussed how to handle rising inflation, increasing cybersecurity attacks, and environmental, social and governance investing, among other topics.
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A lively panel discussion on the highly polarized topic of ESG investing focused on what moderator Thomas Cook, a senior consultant at NEPC, described as “bringing it back to the middle.”
ESG investing is not about “not investing in this or that industry” but rather about “how it can be used as a risk-return economic factor within investment processes,” he said.
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CIO: The Rise of 3rd Party Search Firms That Find Consultants
NEPC’s Steve Charlton was quoted in a recent CIO article to discuss how the process of bringing in the right investment advisers for asset allocators has reoriented how the consulting industry does business. View the article on CIO’s site here.
Increasingly, asset owners are hiring consultants to find consultants. These search experts can help a plan’s board of trustees the whole market while also spotlighting any potential conflicts of interest.
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“The advent of OCIOs has increased the need for search providers, according to Steve Charlton, partner, and head of client solutions at consultancy NEPC. He notes that ‘the more concepts that are introduced into the business, the more necessary it is for a third party to be coming in to evaluate.’
Charlton says roughly a third of NEPC’s business originates from search providers. NEPC offers both advisory and OCIO solutions, with NEPC’s current OCIO business overseeing $60.7 billion in assets.”
CIO Announces 2022 Asset Management and Servicing Industry Innovation Award Finalists
NEPC is pleased to be nominated as a finalist for the 2022 Chief Investment Officer Industry Innovation Awards in the following categories: Diversity and Consultant of the Year, recognizing Kristin Reynolds and Allan Martin. It’s an honor to be recognized as one of the firms driving change and enhancing performance in institutional investing. View the announcement on Chief Investment Officer’s site here.
This year, we are celebrating those who have thrived and been incredible leaders as markets have turned rough and inflation and rates have risen. We are planning to gather in person to applaud their hard work on December 6 at Chelsea Piers in New York City.
As we selected these finalists, our mission was to search the industry for firms that have truly and reliably enhanced the portfolios and improved the work of their clients. While canvassing and reviewing the award nominations, we learned just how hard so many of you are working in the face of a global shift in monetary policy that has made markets challenging.
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The finalists are as follows:
Consultant of the Year
- Mercer Consulting, in recognition of the service of Cori Trautvetter
- NEPC, in recognition of the service of Kristin Reynolds and Allan Martin
- Aiperion
Diversity
- Ariel Investments
- PIMCO
- Verus Investments
- NEPC
Click here to continue reading the full Chief Investment Officer announcement.
The Boston Globe: Harvard, the Richest University, is a Little Less Rich After a Tough Year in the Markets
NEPC’s Kristin Reynolds was quoted in a recent Boston Globe article to discuss how Harvard’s endowment shrunk by $2.3 billion to $50.9 billion during a down time for financial markets. View the article on The Boston Globe’s site here.
Humility is not the first word Harvard University brings to mind.
But last year, when the storied school’s endowment soared in value along with just about every kind of investment on the planet, administration officials wisely tempered their enthusiasm – and expectations for the future. Their message to students, staff, alumni, and the often envious outside world: Markets give and markets take away.
Sure enough, their caveat got a call-back on Thursday as Harvard reported that the value of its endowment – including investments and donations – slumped by $2.3 billion to $50.9 billion in the year ended June 30, amid an ugly selloff in financial markets.
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“My impression is the worst is yet to come,” said Kristin Reynolds, a partner at investment consultant NEPC in Boston and the team leader of its endowments and foundations group. “However, I would say that private markets performance had been so strong the year prior, that it is still helping portfolios relative to public markets.”
Click here to continue reading the full Boston Globe article.
Pensions & Investments: Interest in OCIO Remains Strong, but Growth Slower Than Anticipated
NEPC’s Steve Charlton was quoted in a recent Pensions & Investments article which covered the findings of NEPC’s 2022 Governance Survey. View the article on Pensions & Investments’ site here.
Institutional investors are eager to utilize the services of outsourced chief investment officers, but the market is not growing as quickly as anticipated, according to a new report from investment consultant NEPC.
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“As investment programs have grown over the past several years, we’ve also seen firsthand the increased desire and need for ways to streamline management and operational functions,” said Steve Charlton, partner and head of client solutions at NEPC, in a news release announcing the survey results. “There are often good reasons to maintain trusted advisory relationships, which has slowed the overall progression to OCIO. Some clients look to maintain decision-making responsibility or hand off only portions of the governance process, whereas others have decided to move entirely to OCIO. We believe advisory and OCIO can co-exist within our firm and intend to provide the best services consistent with our clients’ objectives.”
Click here to continue reading the full Pensions & Investments article.
Institutional Investor: Endowments and Foundations Increasingly Want Their Top Advisors to Act Like OCIOs
NEPC’s Sam Austin and Steve Charlton were featured in a recent Institutional Investor regarding the findings of NEPC’s 2022 Governance Survey. View the article on Institutional Investor’s site here.
Institutional investors increasingly want their most trusted advisors to function like outsourced chief investment officers.
In the next five to seven years, a third of endowments and foundations want their most trusted advisors — usually investment managers — to handle their portfolios like OCIOs, according to NEPC’s 2022 governance survey published Thursday. The survey included responses from organizations including public and corporate pensions, foundations, defined contributions plans, healthcare organizations, and endowments.
This increasing reliance on managers and consultants was recorded across fund types, with 19 percent of healthcare funds and 17 percent of defined contribution funds also anticipating that their most trusted advisors will act like OCIOs in the near future, up from 10 percent and 13 percent, respectively.
Among endowments and foundations, 26 percent said they currently view their most trusted advisors as investment managers, which NEPC defined as a “consultant or manager who handles everything like an OCIO.” Thirty-two percent said they see their most trusted advisors taking on this role in the next five to seven years.
“That’s a trend that’s been going on for a while now,” Steve Charlton, NEPC partner and head of client solutions, told Institutional Investor. “At least in the last six or seven years, endowments and foundations have been turning more and more to OCIO-type organizations to manage their assets.”
As institutions attempt to navigate increasingly-complex markets and develop more advanced portfolios with exposure to alternative investments like hedge funds, private equity, and private debt, they may need additional expertise from OCIO providers who have more experience in these areas, Charlton said.
Among the asset owners surveyed by NEPC, 43 percent described their most trusted advisor was a partner, someone with whom they work closely to develop their investment programs. About a quarter said they have advisors (“I make the decisions, but almost always do what they recommend”), while 15 percent said they use a consultant as a key source for information and perspective. Twelve percent identified their most trusted advisor as an investment manager who acts like an OCIO, with 17 percent expecting their top advisors to take on this role in the next five to seven years.
“This survey is reinforcing our belief that more and more investment committees or brand sponsors or whoever it might be are interested in turning over additional responsibilities to their trusted advisor,” Charlton said.
NEPC also asked respondents about the degree to which they consider diversity, equity, and inclusion issues — something which 80 percent agreed was an important consideration in their investment programs.
However, respondents from pension plans (both corporate and public), defined contribution plans, and insurance organizations were slightly less likely to indicate DEI as an important aspect of their program. Specifically, 38 percent of respondents from these organization types said that DEI was not important, significantly higher than the average of 20 percent.
Meanwhile, endowments and foundations were slightly more inclined to say that DEI initiatives were “extremely important” to their organizations. Nineteen percent of respondents from endowments and foundations answered “extremely important” versus 18 percent overall.
This discrepancy may be a result of endowments’ and foundations’ more recent adoption of DEI issues compared to pension plans, according to Sam Austin, NEPC partner and governance board member. Austin said pensions were at the forefront of DEI initiatives in the eighties and nineties. Other institution types have started to catch on in more recent years, particularly after the murder of George Floyd in 2020 and subsequent civil rights protests.
“Endowments, foundations, and healthcare organizations have increasingly caught fire over this issue over the last two and a half years, going back to that catalyzing event of George Floyd,” Austin said.
Austin said endowments and foundations now place a greater emphasis on aligning their organizations’ missions with their investment portfolios than they did ten or 15 years ago.
“The intensity of the issue is more front and center and it’s a fresh topic for the endowment and foundation world, whereas it’s been an issue that’s been on the table for pensions for much longer,” Austin said.
Pensions & Investments: Market Shocks Prompt Allocation Overhauls
NEPC’s Aaron Chastain was quoted in a recent Pensions & Investments article to weigh in on how corporate pension plan portfolios in the U.K. & U.S. have been distorted by upheaval. View the article on Pensions & Investments’ site here.
Corporate pension fund portfolios in the U.K. and U.S. that have been distorted by recent market events are set for an asset allocation overhaul. A combination of rising interest rates leading to falling liabilities, plus increased needs for liquidity in portfolios means asset allocations are, in some cases, no longer serving their intended purpose on either side of the pond. Sources said pension fund sponsors now have an opportunity to further derisk portfolios, with a view to completing a risk transfer or achieving self-sufficiency.
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There are also conversations among U.S. plans on what constitutes an appropriate interest rate hedge, since it “now takes less dollars to achieve the same interest rate hedge,” said Aaron Chastain, Atlanta-based senior consultant at NEPC LLC.
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NEPC’s Mr. Chastain is also seeing some clients reducing commitment sizes but not stopping investments altogether. They “definitely don’t want to eliminate those relationships (with fund managers) for a shorter-term market event in terms of an asset allocation perspective,” he said.
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Bloomberg: Stocks See Late-Day Rebound After Unnerving Twists: Markets Wrap
NEPC’s Phill Nelson was quoted in a recent Bloomberg article to discuss what to expect from the 9/21/22 Fed meeting’s announcement on interest rates. View the article on Bloomberg’s site here.
Stocks pushed higher in the final hour of New York trading, with a rally in megacaps like Apple Inc. and Tesla Inc. driving a rebound that followed the worst weekly rout for the market since mid-June.
Major equity benchmarks had a tough time finding direction Monday as traders geared for another super-sized US rate increase amid fears on whether the Federal Reserve could overtighten and raise the odds of a hard landing. Treasury 10-year yields hovered near 3.5% while the two-year rate, which is more sensitive to imminent policy moves, hit the highest since 2007.
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“The question to focus on isn’t whether the Fed will hike rates by 75 basis points or 100 basis points,” said Phillip Nelson, head of asset allocation at NEPC. “What we’re looking for is how aggressive Powell will be in the next six to 12 months. The messaging we get in the next few weeks could be a bigger data point and a shock to investors.”
Pensions & Investments: ESG: Multi-Asset Investing
NEPC’s Dulari Pancholi was featured in a recent Pensions & Investments article to share top ESG themes as well as developments in data, benchmarks and regulation that are powering continued inflows into ESG investing across both public and private assets. View the article on Pensions & Investments’ site here.
Environmental, social and governance investing has evolved far beyond a process based on exclusion to one that is inclusive, activist and focused on alpha. Institutional investors are addressing the dual purpose — to effect change and generate alpha — via a range of sustainable investment approaches, typically impact funds, asset-specific ESG strategies or multi-asset portfolios.
Across all approaches, the state of investing based on ESG factors is robust. Global ESG assets under management were $35.3 trillion in 2020, up 15% from $30.6 trillion in 2018, according to the Global Sustainable Investment Alliance. ESG’s portion of total global AUM rose to 35.9% from 33.4% in the same period.
GSIA projects global ESG AUM will rise 16%, to $41 trillion, this year; and 22%, to $50 trillion, by 2025. The message is clear: ESG investing is here to stay, and its future is bright
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While a multi-asset strategy can be one of several ways to implement an ESG investment approach, Dulari Pancholi, CFA, CAIA, principal and head of credit and multi-asset at NEPC, said that she sees multi-asset as the right approach for asset owners today.
“The way ESG investing has evolved almost requires you to take a multi-asset approach,” she said. “The investible universe has expanded so much beyond the listed stocks where ESG originated. Now there are asset classes like private debt and private markets, or debt more generally, [and they] are tougher to work with” in terms of the availability of ESG products and challenges in ESG data collection. “In the fixed-income space, for example, you now have green bonds, which are an evolution of green revolving-loan facilities. There are term loans that are tied to sustainability metrics and sustainability-linked bonds that are tied to the ESG performance of the portfolio or underlying company.
“So if you’re trying to build an ESG portfolio that can integrate some or all of the available asset classes, you need a toolbox that can hold a lot of different tools. That’s what multi-asset is all about,” Pancholi said.
Click here to continue reading the full Pensions & Investments article.