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.
Private debt reigns supreme in a wobbly market
Private debt managers have bucked the trend of sluggish fundraising, according to the latest bfinance manager intelligence report, enjoying a 45 per cent increase in fundraising activity and making up 20 per cent of overall activity for the quarter. Nearly 40 per cent of all private markets manager searches in the bfinance database were focused on private debt.
“Despite the relatively positive performance of infrastructure and private debt, the overwhelming sentiment towards private markets is cautious, if not negative,” the bfinance report states. “This is particularly the case for private equity and real estate. The moderation of inflation pressures and the improvement in public markets has provided some optimism for private markets, particularly given the high volumes of dry powder.”
Private debt is experiencing a surge in popularity as interest rates rise and banks continue to pull back from the market. In June, BlackRock acquired venture debt manager Kreos Capital to build out its private market capabilities, while a number of Australian super funds are increasing their allocations to the asset class.
While private equity is still the largest private market asset class it saw a 23 per cent decline in fundraising as investors grappled with heightened liquidity and valuation concerns, as well as illiquid assets exceeding target portfolio allocations amidst a broad fall in equity markets. Meanwhile, listed real assets are also experiencing a moment in the sun.
“When considering the private market manager search activity (and real assets in particular), it’s worth noting the very significant increase in demand for listed real asset strategies – including listed infrastructure, REITs and diversified real asset strategies that may include a commodities component,” the report states. “When contrasted with the stable levels of activity in private markets, this rise reflects a desire for more portfolio liquidity than traditional private market strategies, as well as the perceived attractive pricing of listed real assets.”
One “particularly notable” trend has been a dramatic decline in real estate manager searches amidst a dislocation in commercial property, which has been partially offset by a significant increase in demand for agriculture, timberland and other natural capital strategies with a carbon offset angle.
“The overall sentiment to real estate is negative,” the report states. “The higher level of debt, the increasing volume of debt maturities and high levels of redemption activity are negatively impacting values, albeit with big variations by geography and sector.
“The UK seems to have been the hardest hit, with values in continental Europe falling more modestly. In the US, the ODCE index of Core real estate market performance fell a further 3.6 per cent in the quarter with greater falls for the office sector given the uncertainty over future cashflows and the capital expenditure required to bring assets up to modern requirements.”
