The LP Blueprint for 2019: Global LP Views on Alternative Investment Opportunities

July 09, 2019

By Thomas Murdoch

Alternative investments (“Alts”) continue to play a major role in satisfying limited partner (“LP”) return objectives.  How are investors viewing these opportunities in 2019 and beyond?  What purpose are they pursuing when allocating capital to this asset class?  Have their expectations regarding reporting and operational diligence from asset managers changed?

On June 19, EisnerAmper held its 4th Annual Alternative Investment Summit at The Museum of Modern of Art (MoMA). The LP panel featured Octavio Sandoval from MassMutual, Kenneth Sim from MontLake Funds (UK) Ltd., Michael H. Sinoway from Glenmede, and Peter Zakowich from PAAMCO Prisma.  The panelists discussed investor outlook for 2019, expectations, strategy, and the demand for alternative investments.

Investor Outlook & Expectations

Investor allocations in alternative investments are expected to increase through the year 2020 and beyond -- at least 75% of our distinguished audience, comprised of CFOs, CEOs, GPs and LPs, believe this to be true.  Even with valuations at an all-time high, there has been constant demand for investment in the Alts space, both foreign and domestic.  Mr. Zakowich commented that although it may be trickier to raise capital and generate alpha, there is still a large demand.  Kenneth Sim further noted that there is a lot of interest from European investors and he hasn’t seen these record valuations affecting investment activity or what institutional investors are searching for. 

What are LPs looking for?  Well that depends.  Our panelists unanimously agreed that the profile of the investor should determine the strategy deployed by the fund managers.  Liquid versus illiquid, fee sensitivity, and investment timeline are all considerations that managers must take into account.  Matching risk vs. reward and investor liquidity is the key to a successful partnership.

And where do investors see potential for that perfect risk/reward scenario?  Well with the U.S. approaching a ten-year bull market, and attractive opportunities becoming harder to find at home, investors are looking elsewhere.  But with the geo-political drama of trade wars, Brexit, and uncertainty in the Middle East, the risk has elevated.  But so too has the reward!  Mr. Sandoval believes that where there are regulatory hurdles and political uncertainty, inefficiencies are created, and managers can capitalize.  Mr. Sinoway added that with the continuous rise of the Chinese consumer, many Asian markets remain extremely attractive.

When discussing risk profiles, liquidity, or domestic vs. foreign investment, there can be a lot of differences in investor requirements.  However, the one thing all investors have in common is the need for meaningful and consistent information.  Whether this need is a byproduct of the information age, the increasing edification of your typical investor, or ILPA, investors demand quality data.  Investors want managers to focus on what they are good at, generating returns (hopefully)!  But they do not want to compromise reporting or the timeliness of it, fund governance, information security, and excellence in service provider selection.  All agreed that managers should not skimp on the necessary things.

The Emerging Manager

Emerging managers have been a hot topic in the alternative investment space and an avenue for investors to allocate capital.  But why are emerging managers attractive?  Or why not?  Our panelists touched on both.  Some key takeaways are as follows:

Potential attractive qualities:

  • Hungrier managers seeking acceptance and approval
  • “Friendly” fee structures
  • Fresh outlook and investment strategies

  Potential unattractive qualities:

  • Lack of both pedigree and track record
  • Not as transparent or sophisticated in financial reporting
  • Business risk is greater (operational failures)

The relationship between the investor and the emerging manner should be treated like a marriage: Provide support, and the hope is you will grow together.

To check out our blog series from each panel from the EisnerAmper 4th Annual Alternative Investment Summit, please click below:

About Thomas Murdoch

Thomas Murdoch is a Manager specializing in financial statement audits serving private equity clients, hedge funds and funds of funds.

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