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.
Super fund demand rises to sell illiquids
In the current circumstances big funds are likely to have to sell at least some illiquid assets, presenting them with an operational issue. Enter the aptly named Melting Point Solutions, a San Francisco-based global specialist broker, represented in Australia and New Zealand by Allen Partners.
Scott Riedel, an Allen Partners partner, says that there are three main drivers of the heightened interest in the Melting Point service at the moment:
- The relative performance (or underperformance) of public markets has put the proportion of private market assets above some portfolio limits
- A move by many individual members of super funds from growth to defensive options, and
- The Australian Government allowing super member to access up to $20,000, which collectively could amount to outflow of $27 billion, according to one estimate. Funds with a lot of younger members in certain industries, such as hospitality, health care and retail, are likely to be the most impacted.
Melting Point, founded by Raphael Haas, the chief executive and a former corporate M&A manager, in 2014, has a broad investor base of more than 400 potential buyers of secondary alternative assets. It runs auctions for any size of fund or position among them. Luckily, the auctions have always been conducted online.
In a note to clients last week, Haas said:
“The current market conditions are causing, and will continue to cause, massive dislocations across all segments of the capital markets, likely resulting in unplanned liquidity needs for some investors in illiquid alternative investments.
“For the past 10 years, the maturing secondary market for alternative investment funds and directs (private equity, venture capital, real estate, real assets and hedge) has been an efficient tool for 1) investors to access earlier-term liquidity on as-needed basis or 2) “portfolio clean-up” transactions in a market that was, more-or-less supply constrained (that is, more buyers than sellers) and characterised by frothy pricing. We expect this dynamic to change.
“The near-term secondary market will most likely be characterised by sellers who may not be opportunistic but rather selling out of liquidity needs and buyers who can afford to be more judicious than in previous years. This will result in inconsistent pricing across buyers and bottom-fishing behavior. That said, we do believe that, while the near-term paradigm is less seller friendly than in the past several years, a deeper and more mature secondary market (compared to 2008-09) will continue to serve as a meaningful and useful tool for investors seeking liquidity … once the current volatility abates.”
– G.B.
