Uncorrelated returns, long-term impact remain focus for LP’s: Eaton Partners

Institutional investors surveyed by Eaton Partners remain focused on finding sources of relatively uncorrelated return from their alternative and private market investments, while the majority intend to stay with their allocations to alternative investments, citing a long-term focus.

The long-term portfolio impact of an asset class remains key rather for limited partner investors, rather than triaging portfolios to weed out under-performers at this time, the latest survey from Eaton Partners found.

The company is part of the Stifel Financial Corp. group of companies and one of the largest capital placement agents and fund advisory firms, and polled limited partners of institutional investors for their views on allocations between May 13th and May 19th 2020.

In a previous survey a few weeks ago, Eaton Partners found that institutional investors were committed to their private market or alternatives allocations despite the dislocation caused to financial markets by the Covid-19 coronavirus pandemic.

In addition, sources of return that exhibit lower correlation are being seen particularly favourably at this time.

However, fewer investors are now looking to make no changes than before, as the prolonged nature of the pandemic financial impacts become clearer.

In the latest survey, which again focused on private market asset classes, which would include alternatives such as insurance-linked securities (ILS) and reinsurance-linked investments, 51% of the institutional investors surveyed said that they plan no changes to their private market allocations at this time. That’s down from 64% that said this in April.

However, just 8% said they would cut alternatives allocations significantly, 18% would cut them modestly, while 17% would increase allocations to private market asset classes modestly and another 6% would increase them significantly, the survey found.

“As investors grapple with volatile markets and ongoing uncertainty about the true impact of COVID-19, they will benefit from strategies that offer strong uncorrelated returns to the public equity markets,” noted Jeff Eaton, Partner at Eaton Partners.

“At Eaton Partners, we are seeing an increased appetite for actionable opportunities among investors looking to take advantage of perceived market dislocations. Interest in infrastructure continues to grow, particularly in data and IT as well as ESG-focused sectors like renewables, power, and water. We also expect to see more opportunities in healthcare and other mission critical sectors like technology, mobility, and e- commerce.”

The findings remain positive for investments into insurance-linked securities (ILS) and reinsurance linked investments, as these are able to offer some of the least correlated returns in the market right now.

Encouragingly, Eaton Partners says that its latest survey results, “suggest that some of the biggest fears surrounding the private capital markets appear overblown.”

55% of the institutional LP investors responding said that they are not concerned about the denominator effect, which is where public and private market valuations exhibit a lag between them, making allocations more challenging for some.

This has, in the past, been discussed as an issue in the ILS and reinsurance space, where reporting differs greatly and so too valuations can, between the public market insurance and reinsurance investments that are made, versus the private ILS funds.

Largely though, in ILS this is down to a lack of understanding of the features of the asset class in the main, with the lag sometimes being in reverse, and ILS investments exhibiting more transparency and timeliness in terms of feedback to investors at times.

The majority (56%) of the limited partner investors surveyed said that they are not facing liquidity issues, which is also positive for the ILS sector.

As we know, the ILS market can be viewed as a source of liquidity, particularly through catastrophe bond investments which are more liquid and easily saleable.

We saw this immediately after the coronavirus pandemic escalated earlier this year, with significant selling pressure in the cat bond market as institutional investors looked to secure cash from any asset classes they could.

With cat bonds, ILS and other reinsurance related investments not exposed, in the main, to any losses from the pandemic, investors could secure cash with limited valuation downside.

So, if LP’s are feeling more secure now, with less in need of immediate liquidity, that is perhaps a positive sign for ILS, as it could suggest any remaining selling pressure in the market will continue to diminish.

Also positive is the fact institutional investor LP’s are adjusting fast to the new normal, with 20% saying the new normal is expected to rely heavily on video conferences rather than in-person meetings with general partners of fund managers (GPs).

Meanwhile, 53% expect to have a mix of virtual and physical meetings going forwards and just 27% expect things to go back to the way they were before the COVID-19 pandemic began.

The inability to do due-diligence in person had been raised as an issue for investors right after the pandemic outbreak began, but it seems many are becoming more comfortable in the fact virtual meetings are set to be a feature of investment markets for the foreseeable future.