“What to buy when nothing is cheap?” asks Heather Gillers of the Wall Street Journal. High prices across the board—from stocks to private equity holdings—pose a challenge for institutional investors in search of returns. For public pensions, this challenge is heightened as retirees accelerate outflows.
But one asset class is standing out from the rest: only private equity outperformed public equities over the last 10 years. Recently, we’ve seen LPs capitalize on these outsized returns by increasing their target allocations to private capital, and getting smarter about the asset class. Moving away from the traditional “outsourced” model, we’ve seen many investors reduce the scope of—or eliminate—their relationship with consultancies and funds of funds, hiring teams to manage these investments in-house.
But for investors predominately focused on traditional equities and fixed income, wading into the world of private capital can be complex. It’s a long-term play (don’t expect liquidity for at least ten years), so you need to be diligent and strategic in your manager selection. It’s also becoming more fragmented by the day—the number of private equity and venture capital fund managers doubled over the last ten years—posing a challenge if you don’t have many existing relationships.
So, how can institutional investors tap into high returns in the private markets—while overcoming these obstacles?
Having a full picture of the private markets will help you make the smartest allocation decisions possible—whether that means evaluating historical returns across asset classes to validate your strategic asset allocation or evaluating one individual fund manager.
Over the next four weeks, we’ll dive into four ways institutional investors are using data to more successfully invest in the private markets. Here’s a sneak peek:
Identify top-performing funds
Identify top-performing funds—and get ahead of funds coming to market—with open/closed funds, IRRs, cash flow multiples and dry powder figures
You need to be able to quickly and easily scan for funds in the market—now. Parse through open funds, and evaluate each manager’s historical performance by digging into closed funds’ return data like IRRs and cash flow multiples (we’ve seen most LPs prioritize DPI). Go a step further to see closed funds’ underlying investments, deal multiples and liquidity events.
Certain triggers can help you get ahead of top-performing funds before they come to market. Once you’ve identified top GPs based on the metrics that matter to you, zero in on those that have funds with minimal dry powder remaining—but haven’t announced a new fund yet. They’ll likely start fundraising soon, and with this intel you can reach out before other LPs come knocking.
Track and evaluate managers
Track and evaluate managers with funds’ underlying investments, custom benchmarks and individual LP return profiles
If you haven’t seen all of a GP’s past investments, you aren’t getting the full story—period. Did they drive solid growth across their past portfolios, or did they invest in Snap’s seed round? Did their previous investments line up with their thesis? Not only does this intel shed light on their approach, but it also speaks to their integrity—a crucial characteristic when you’re entering a 10+ year relationship.
Plus, the ability to build your own benchmarks that compare a fund against others that have actually made similar investments (rather than relying on the age-old vintage/type/size/location combination) will speak volumes about that GP’s track record.
At the end of the day, you need as much returns data possible to serve your stakeholders to the best of your ability. Top-line metrics are helpful, but where you’ll really gain insight is by seeing who reported the figure. Do you need to account for reporting bias if a GP and LP report different figures? If multiple LPs reported different returns in the same fund, perhaps they had varying fee structures—another indication of a GP’s integrity.
Understand the full scope of the market
Understand the full scope of the market—from LPs and commitments down to companies, transactions and emerging sectors—and validate your allocation strategy
You’re constantly toggling between the macro—your strategic asset allocation—and the micro—your portfolio of fund managers and their underlying investments. Your data should also connect these dots and allow you to perform analysis across your focus areas.
Make sure you’re informed of the market at large with data that spans LPs and commitments (where are other LPs committing capital? Who’s most active in the asset classes I care about?) down to funds, GPs, investments and companies (who’s the next Uber or Airbnb? What industries are growing and contracting?).
Find and close direct investments
Find—and close—direct investments more efficiently with private company and deal data
Today, many institutional investors are considering direct investments to avoid traditional fee structures. If this is of interest to you, you need detailed deal-, sector- and company-level data to be on even footing when it comes to negotiations.
We recommend prioritizing depth of data. As a strategic asset allocator, a database of 10 million private companies won’t help you find opportunities that align with your strategy or mission. Think about sponsor-backed companies (they’ve already been vetted by sophisticated investors), and make sure you have access to precedent private transactions, cap tables, pre-money valuations and deal multiples to execute the deal with confidence.
