Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Market distortions boost demand for private markets
Short and long-term factors are benefitting investors and their managers which have either entered the private markets space or expanded their capabilities. To the chagrin of detractors, Australia’s big not-for-profit funds can hang their hats largely on private markets for much of their outperformance.
We all know UK based global manager Schroders is very old, dating back to the mid-19th century, and has had finger in most pies over all that time. Less well known is that it has been associated with private markets in one form or another for most of its 160-year history. Globally it manages about Stg45.3 billion (A$83.7 billion) in private markets.
At a briefing on private markets last week (October 29), Chris Durack, the Sydney-based chief executive, said private markets were especially important in the current market due to the current listed market distortions and volatility. Meanwhile, investors had to meet their objectives.
But, also, the structure of the listed markets is shifting, with the number of listed companies declining. In the US and UK, the number of listed companies has declined by more than 50 per cent since the 1990s and companies are remaining unlisted for longer. There was also a dislocation in the loan market in Australia and elsewhere, Durack said,with banks exiting market segments, after the GFC prompted new capital requirements, giving rise to new opportunities for private debt.
Schroder appointed Nicole Kidd to the newly created role as head of private debt in Australia in August. She has about 25 years of experience in investment banking and funds management and joined from RBC where she headed up corporate banking. The firm also organised the relocation of Claire Smith from its London office to head up the region’s push as director of alternatives.
Smith said that one of the benefits of private equity, from Schroders’ perspective, was that 70-80 per cent of its portfolio companies were family owned and therefore were more emotionally involved and wanted a partnership with investors. They were not driven solely by price. Small companies among them tended to have lower leverage and had multi-year strategic objectives.
“Private equity delivers a higher return, including an illiquidity premium… This is a form of risk, but long-term investors are happy to take it,” Smith said. There was also a broader range of companies to choose from in the private equity world.
The five major factors driving private markets were: low growth and low interest rates, pockets of high growth (in Asia), a phase of de-globalisation, changing consumption patterns and continued growth in technological developments.
Smith said Schroders was one of the few companies which could access the burgeoning Chinese technology market in renmimbi. The Schroder Adveq fund – Adveq being an established global private equity fund-of-funds manager acquired by Schroders in 2017 – had no performance fee attached. The firm also had a retail fund with low minimums and liquidity opportunities “in months not years”, she said.
With respect to venture capital, generally considered a sub-set of private equity, Graeme Mather, head of product and distribution, said venture had been a key thematic for the manager because of its strong focus on growth areas such as technology, medical devices and biotechnology. He said one of the reasons Schroders had become a client of Antler (see separate report this edition) was to give the firm access to innovation and venture exposure.
Smith said that Schroders was more a second or third-round investor in venture with a focus on biotech in China and Asia. She said that the fund CIOs the firm spoke to expected to increase their allocation to private markets despite being benchmarked to public markets (see separate report on Preqin research this edition).
– G.B.
