Building portfolios in a shifting world
Institutional investors are facing a changed macro-economic and geopolitical environment. So how is all this feeding into their allocation decisions?
"For institutional investors, this uncertainty and flux creates headaches, but also potential to generate strong returns. “What we see today is a perfect storm of economic and political forces combining to cloud the outlook,” says Dorothy Kelso, Global Head at SuperReturn. “Yet more difficult times are precisely when private markets tend to outperform.”
"The question, however, is which parts of private markets and which regions and markets are best placed to achieve this. Myron Zhu, Head or Private Markets, Asia, at Manulife, adds: “We’ve never seen a market like this before,” he says. “This is not like historic corrections; it’s more of a paradigm shift. Many of us have benefited from globalisation, but we’re seeing that going into reverse because of various geopolitical factors. How do we allocate and deploy capital in the light of the challenges and the change of market? It’s a dynamic question for all investors.”
How do we allocate and deploy capital in the light of the challenges and the change of market? It’s a dynamic question for all investors.
1) Take the long-term view
“We are all children of globalisation,” says Ralph Keitel, CIO at SIFEM. “We have studied and worked in different countries so it’s hard to imagine a world that is different from the one we grew up in. We’ve had 60 or more years of globalisation and we’ve seen what ‘cheap China’ can do for consumers and what rising consumer spending, in turn, can do for private equity returns. The question now is how tomorrow’s world will look different from today’s. If you’re building a portfolio of tech companies in Asia and planning to exit in the US, will that happen? Or should you be planning instead to sell to a Chinese investor? It is quite possible that, in the near future, only one of these will be an option for many sectors. However, I have seen 20 years of ups and downs in emerging markets, from currency crises to political crises and civil wars Entrepreneurs and investors find solutions and life goes on.”
2. Go for growth
“From a global perspective, there are lots of challenges around portfolio construction today,” says Philipp von dem Knesebeck, Managing Partner, Blue Future Partners. “But for us, nothing has really changed. We invest in emerging managers and we still consider geography risk, manager risk, technology risk and team risk among others. We see our allocation to Asia as a hedge – we don’t know what will happen in the US and Europe, but we do see a lot of growth potential and favourable demographics in Asia. It’s very hard to time the market. So, we invest in Asia to diversify precisely because there are so many risks emerging.”
3. Expect downturns
"Our private markets programme is relatively new, but we have a guiding principle that private equity is a long-term asset class and so macro cycles are inevitable during a fund life – we don’t pivot our portfolio based on the current conditions; we simply keep on constructing our portfolio based on who we think will consistently be great managers over the next 10 to 20 years,” says Noriko Hayashi, Head of Private Equity, ORIX Life Insurance Corporation. “We make the same level of commitment every year and we construct our portfolio of managers that will not be affected by the same shocks. We look for different risk-return profiles and managers who complement each other.”
4. See the opportunities in downturns too“It may look from the outside that there is a lot of money flooding into India right now, but it is not commensurate to the size of the opportunity the country presents,” says Ruchira Shukla, Regional Lead, South Asia, Disruptive Technologies at the IFC. “Moreover, with the current slowdown, we are seeing longer deal cycles in direct investments and the terms are
more investor-friendly. GPs are not competing with each other as much and they are not overbidding. They are getting the right deals at the right price on investor-friendly terms. As GPs, the deals done over the next 12 months, will be our best deals. As an LP, we will end up getting better returns for capital that is deployed now than was the case a couple of years ago.”
5. Ultimately, it’s all about the manager
“Private equity is a people business,” says von dem Knesebeck. “Our objective is to find the best GPs anywhere and at any time. I honestly don’t care whether a market is a particular beneficiary of reshoring, for example; if I can’t find the right manager in that market, I can’t do invest there. As an LP, it is always about the best managers.”
It may look from the outside that there is a lot of money flooding into India right now, but it is not commensurate to the size of the opportunity the country presents
