Small talk: a big miss in 2020

by Andrés Ramos, Content Marketing Specialist – eVestment Private Markets

In late August, eVestment Private Markets hosted a virtual panel with two LP investors about adapting to digital due diligence. During the conversation, one of the investors had this to say about the remote environment the industry is now operating in:

What’s been a challenge is not having informal interactions, not having AGMs where you can have those longer informal conversations with your managers, and your peers – the exchange of ideas is not as strong at the moment.

The comment brings into focus one of the idiosyncratic ways that institutional investors gather information and build their knowledge in the private markets: through informal small talk with other industry participants. Industry conferences and AGMs have gone digital in 2020 to varying degrees of success, but what these virtual settings lack are the spontaneous conversations that can only truly occur in person during events like conference coffee hours or LP luncheons.

The dearth of informal conversation opportunities in 2020 has meant that LPs are not interacting with their peers as much as they would normally and are missing out on opportunities to hear different opinions, insights, and perspectives on the state of the market. To help compensate for the absence of these small talk opportunities, we thought it might be helpful to offer some insights we have access to through our Market Lens platform. These perspectives come from three well-known private markets consultants and are sourced from memos prepared for their respective clients.

Aksia – September 2020

Be Skeptical of Legacy Portfolios

  • In today’s market, we believe it is important to re-underwrite a manager’s active investments when evaluating whether to commit capital
  • In our view, valuations of relatively recent investments may be inflated by 10% to 15% in many cases due to a valuation lag effect

Valuation lag in private markets portfolios is something we’ve touched on in the past when discussing the denominator effect. But now, as the public markets have recovered, question marks still remain with regards to the valuations of active investments. Accurately underwriting their existing portfolio will help LPs understand exactly how much they can commit to new opportunities without exceeding their target allocations.

TopQ+ clients are leveraging the platform’s “What If” module to execute this kind of analysis. The module allows uses to apply haircuts to individual positions or overall funds to understand the potential impact of valuation changes on a portfolio.

NEPC – October 2020

Private Markets Thoughts & Actions

  • While valuation declines will negatively impact current holdings, new capital deployed in recession-era vintages have the best opportunity for higher alpha and illiquidity premia.
  • Maintain new commitments to capture higher illiquid returns; continue to back high performing managers but look for opportunities to access other top tier managers

The idea of investing through a crisis is something eVestment Private Markets also explored in an analysis looking at performance through the Global Financial Crisis. The vintages that followed 2008 were much stronger than those that preceded the GFC and investors would do well to put capital to work now to achieve similar results in the wake of this present crisis.

With traditional due diligence days completely absent from the current environment, technology has played a much larger role in the process. When it comes to new manager evaluations, TopQ+ users are leveraging the platform for things like PME and benchmark analysis to help understand GP performance. Managers who performed well through the GFC are likely well-equipped to navigate the current environment, and TopQ+ is helping LPs surface those names.

Hamilton Lane – October 2020

Key Private Markets Observations

  • LP commitment activity has continued, supported by robust data and technology
  • Private markets [investors] with plenty of dry powder are well positioned to take advantage of new investment opportunities

Operating without technology in the private markets is a massive missed opportunity. First movers and early adopters are already reaping the benefits of adopting technology as part of their fund due diligence processes. Investors who are slow to adapt technology risk missing out on compelling opportunities they have failed to identify.

TopQ+ is helping LP investors like Caltech understand GP performance for better apples-to-apples fund comparisons. These analyses help them pick the managers that best meet the needs of their portfolio and risk tolerance. Today’s market opportunities are heavily tilted in the favor of investors who have the most information and use technology to make decisions with it. LPs would do well to make sure they’re able to capitalize on those opportunities.

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