ALTS Silicon Valley (ALTS SV) 2022

It’s no secret that the alternative investment industry has been impacted by the current macroeconomic environment. The Bay Area came together at ALTS Silicon Valley (ALTS SV) 2022, a two-day conference at the Computer History Museum earlier this month in Mountain View, California where panelists shared their outlook on various topics.

Keynote speakers included:

• Dan Bienvenue, CFA, CAIA, Deputy Chief Investment Officer, Total Portfolio, CalPERS Investment Office;
• Alison Romano, Chief Executive Officer & Chief Investment Officer, San Francisco Employees’ Retirement System;
• Mark Anson, CFA, CAIA, Chief Executive Officer & Chief Investment Officer, Commonfund;
• Barry Eggers, Founding Partner, Lightspeed Venture Partners; and
• Robert Stevenson, CFA, Co-Head of Private Investing, Franklin Equity Group, Franklin Templeton.

The following topics were discussed:

Global Macro Impacts on Asset Allocation  

Current global macroeconomic conditions have impacted asset allocation. Numerous factors such as inflation, market volatility, interest rates, supply chain pressures and the changing regulatory landscape will continue to test the markets in 2022 and beyond. Investment strategies that include private non-correlated assets could be attractive since private assets are isolated from impacts of short-term volatility of public markets. Diversification of investments across asset classes, geography and purpose would help minimize the impacts of adverse macroeconomic conditions. Asset managers will need extensive due diligence, a fiduciary mindset, consistency, and conviction to execute their investment strategies in these tough times.

Active Portfolio Management by Artificial Intelligence

Artificial intelligence (AI) can extract data efficiently to generate accurate forecasts of market volatility, macroeconomic trends and a potential financial crisis. It can also help analyze large amounts of data in a timely and cost-efficient manner by reducing errors, avoiding data redundancy and relieving capacity constraints. AI is an extremely useful tool in analyzing public markets, but it requires close human supervision. Assets managers need to run multiple stress tests before accepting results from an AI-based model or forecast. While AI can be used as a tool, asset managers will need to engage themselves in active portfolio management to achieve desired outcomes.

Private Equity and Venture Capital

Private equity and venture capital investments (“private investments”) will continue to be relevant to allocators in 2022 and beyond and they have the potential to provide downside protection in an economic downturn. The balance between public and private investments could be a function of liquidity an asset manager wishes to maintain in their portfolio. Asset managers also weigh other factors in their allocation decisions such as commitment-based fee structures for private investments rather than fees on deployed capital as well as the unpredictable nature of cash flows (capital calls spread over the investment period).

Fundraising by venture capital funds slowed down in 2022 when compared to the record-breaking fund raise in 2021. Despite the slowdown, 2022 is still likely to end up being the second-best year so far for fundraising. Venture capital returns have typically exceeded public market returns over the long-term and the optimal years to invest are usually one or two years after an economic downturn.

Venture capital funds currently have significant dry powder to drive dealmaking and there is a sense of market normalization. Asset managers are negotiating deals at a lower valuation compared to the prior year, which suggests that deal terms have evened out instead of being extremely favorable to the founders. Portfolio companies are extending their financing rounds from the prior year into 2022 and are offering additional investment opportunities at the same price as the prior year. There are portfolio companies out there who have raised sufficient capital in 2021 and are not looking for additional financing in 2022.

ESG and its Impact on PE and VC Investments

ESG and impact investing continue to be important to investors and allocators. Investors are looking for asset managers who can provide financial returns as well as identify investments that offer an opportunity to make positive environmental and societal impact. Some institutional investors have ESG mandates that drive their investment decisions; for example, some intentionally direct capital toward investments that deliver positive social and environment outcomes and stay away from those that impair natural resources, contribute to climate change or harm society at large.

Asset Manager Selection

While there isn’t a secret formula for the selection of the right asset manager, investors could look at the three “Ps” (people, process, performance) before choosing one. In addition to performing due diligence on the asset manager and looking at their track record, investors should determine if the asset manager or the firm they are dealing with has an investment process that is well thought-out. One factor for consideration is whether the managers are adding any operating value to the portfolio companies they invest in. Another is whether the manager has any skin in the game, and it is a good sign if the manager meaningfully invests in their own fund. Asset managers have gotten better at managing internal rate of return (“IRR”) with tools such as subscription lines of credit and deployment of effective cash flow management strategies. Instead of IRR, investors might want to look at return on invested capital (“ROIC”) while assessing manager performance.

The conference concluded with a cocktail reception allowing the participants an opportunity to network with their peers. The participants were optimistic about the innovation the investment community will facilitate in the coming years that will help solve bigger social and environment problems not only in the United States but also within the underserved communities around the world.