In a recent Real Deals webinar, co-hosted by Intralinks, LPs discussed their market preferences and concerns as they make allocation plans.

On the panel:

Meghan McAlpine, director, strategy & product marketing, Intralinks

Alex Barker, principal, HarbourVest Partners

Merrick McKay, head of Europe PE, Aberdeen Standard Investments

Moderator: Simon Thompson, senior reporter, Real Deals

Click here to listen to the full discussion

Fintech platform Intralinks' annual report surveyed 196 LPs across the globe for an insider's view of how LPs are selecting funds and their allocation plans for the year ahead. Meghan McAlpine, director, strategy & product marketing at Intralinks, led the study. She revealed that alternatives continue to be a key component of LPs’ portfolios. She noted that demand remains robust, even amidst Covid-19 uncertainty. Infact, 75 per cent of LPs are looking to increase allocations to PE.

“Overall, LPs were satisfied with the performance of their alternative portfolio in 2019. Exactly 50 per cent said that performance fell in line with their return objectives, while a quarter of the investors felt that the performance had exceeded [expectations]. Nearly half of the survey respondents attributed private equity to delivering the best risk adjusted returns for the last year,” McAlpine said.

Merrick Mckay, head of Europe PE at Aberdeen Standard Investments (ASI), said PE allocations are increasing for good reason. “When [LPs] take a longer view, PE generally delivers.” Alex Barker, principal at HarbourVest Partners noted that the PE model has also proven its resilience. “Consistently strong returns over the last 10 years, since the financial crisis, is what is driving a lot of the interest in alternatives today.”

Preferred strategies

In conducting the research, McAlpine found that 33 per cent of LPs cited co-investing as a preferred investment strategy, while 22 per cent noted direct investment. McKay acknowledged the co-investment trend as pervasive amongst LPs and his peers. He suggested that Covid-19 is only adding to it further.

“One of the potential impacts out of this [pandemic] is there is going to be a lengthening of duration. There is that need for some to be getting out, when it’s not the optimal time for them.” Barker noted that while overall appetite for co-investment remains strong, where that demand is coming from might be shifting.“A lot of people who have been active co-investors over the last 4-5 years have actually retracted from that market [in the current climate]. That creates a great opportunity for folks like ourselves, who are active, but also have well resourced and large teams that are able to diligence co-investment opportunities thoroughly… It’s a great time to be a co-investor.”

New and emerging managers

The survey revealed that 35 per cent of LPs surveyed were looking to back emerging managers. Given the current climate, McAlpine asked Barker and McKay if that will continue for LPs or will they instead look to more established managers that have weathered downturns previously.

Barker noted that there is evidence of outperformance from emerging managers and first time funds, as they are often motivated, have something to prove or have innovative strategies.

“We also quite like the dynamic when we see individuals that we’ve known for a long time and thought to ourselves; if that person ever spun out and banded together with some other like-minded individuals, that’d be something we’d really like to support and get behind,” Barker said.

McKay argued that it is key for emerging managers to have previous success in comparable funds. “Backing anybody now who hasn’t got the T-shirt of having been through at least one or two crises would be a complete no go for us.” He added that limitations on meeting in person, make committing to emerging funds that much harder to justify.

Long-term tech shifts

As the industry has found itself working remotely, McAlpine noted that LPs have had to integrate outsource technology. A total of 90 per cent of the LPs in the study, ranked the quality of GPs outsource technology capability as important.

For HarbourVest, Barker explained that capacity to depend on techenabled interactions largely depends on its relationship with the GP. “With a manager that you know very well and you’ve invested with before, that’s not an issue.” He added that starting from scratch and investing with a completely new manager “would probably be a tough ask”.

Even when working with managers that ASI has invested with previously, McKay asserted that it is far from ideal. If you’re not meeting them, you are not picking up on the things that might have changed. Just having known a manager for a long period of time is not a panacea.”

Both McKay and Barker noted that many of the tech-enabled working practices the pandemic has forced the adoptions of, are likely to continue and become standard practice even as the pandemic recedes.