Barron's: Wall Street Is Marketing Private Equity Investments. The Rich Are the Targeted Buyers.
NEPC’s Sarah Samuels was recently quoted in Barron’s, exploring the growing push to open private markets to individual investors through semiliquid and evergreen funds. Visit Barron’s to read the full piece and hear Sarah’s perspective on the opportunities — and risks — for private-wealth investors in this evolving space, or read the excerpts below.
As pension funds, sovereign-wealth funds, endowments, and other institutional investors pare private-equity stakes to generate cash and rebalance their portfolios, Wall Street has gone looking for new buyers: retail investors who have long been shut out of private markets.
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The fact individual investors haven’t widely participated in private markets means they are “getting increasingly concentrated portfolios in the public markets,” says Sarah Samuels, partner and head of investment manager research at investment consultant NEPC.
Investing in private markets through evergreen structures allows individuals to get access to more diverse opportunities, Samuels says. But she also cautions that investors need to tread carefully. Even semiliquid funds aren’t as liquid as public funds, and the fees on these vehicles are much higher—generally around 1%, she says, versus an average expense ratio of about 0.34% last year for all U.S. mutual funds and ETFs, according to a recent analysis by Morningstar.
The success of private market strategies also heavily depends on the quality of the fund manager, Samuels says. The difference in outcomes between the best manager of a large-cap stock strategy and the worst is about 5%, compared with more than a 45% spread between the best and worst private-market funds in certain strategies, she says.
She suggests private-wealth investors limit their allocations to private markets to a “target range that’s meaningful enough to move the portfolio, but low enough that there isn’t going to be a liquidity issue.”
Buyouts: LPs consider benching old benchmark methods and gauges
NEPC’s Kristin Reynolds was recently featured in Buyouts, offering her perspective on the challenges institutional investors face with benchmarking in private markets. Visit Buyouts’ website to read the full article and explore how evolving performance metrics are reshaping investment conversations.
The standard mode used to communicate risk-return goals is being re-examined given new frustrations with long-held tools.
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Consulting firm leader Kristin Reynolds puts it like this: if you’re looking for the perfect benchmark for gauging risk and returns in the private markets, it’s not out there.
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Reynolds, a partner and practice group director at NEPC, says that across the spectrum of institutions there’s an eagerness to use benchmarking to figure out the opportunity cost of leaving money in private market assets instead of public equivalents. But she adds that LPs aren’t always getting a clear enough picture of that with current benchmarks.
Institutional investor staff, boards and consultants have been left with uncomfortable conversations about why things look so different than selected benchmarks. And, according to Reynolds, that’s led to a shift in focus to indexes that weigh portfolio performance against that of all the managers a fund could have invested in.
“That has been better for most organizations that are trying to understand how PE moves relative to other privates, ” she says. “But the downfall of that is really you might be building a portfolio that’s heavily venture-weighted or has other specific traits. Meanwhile, these indexes are painting with a very broad brush.”
Outside of PE, private market benchmarking doesn’t get any easier, Reynolds says. “In fact, for an asset class like private credit, it can be harder. That’s because there’s less observations. Once you take an index of the big providers and start slicing and dicing them, you end up with 15 different managers in an index, and not enough for statistical significance.”
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Reynolds adds that the manipulation of IRR – sometimes demonstrated to LP boards as measures of success – can be done by timing when a manager calls capital and how much debt they’re using in the fund to smooth out the capital call process.
“When people really focused on how managers have control over this measurement, they started thinking more about metrics such as total value to paid-in (TVPI) and now distributed to paid-in (DPI), ” she says. “The impact of a focus on DPI is that an LP may not focus on a manager’s second or third fund if distributions from the last fund are still really low.”
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Reynolds says when there’s a movement that profound in the benchmarks for an asset class, it kick-starts conversations between an LP’s staff and board about whether there should be a scaling back of pacing. And when an investment team’s performance is often measured by its record of overdelivering compared to benchmarks, friction is always a possibility.
Planadviser: Bringing Advice to the Masses
NEPC’s research on managed account adoption trends is featured in this PLANADVISER article, highlighting how plan sponsors are increasingly exploring personalized financial advice solutions for participants. Visit PLANADVISER to read the full article or read excerpts below.
When offered, managed accounts can provide a full financial planning experience—from accumulation through retirement.
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Not everyone in the industry, though, subscribes to that sentiment. A February NEPC paper counters it, pointing out that high fees tend to erode the value of managed accounts, as a fee of 30 basis points typically requires a participant to increase his equity exposure by 20% to 30%, or by two to three TDF vintages, to achieve a similar net-of-fee return. Moreover, NEPC argued, participants paying the lower fee of 15 bps, for example, could anticipate returns comparable to a typical TDF investor. Nevertheless, despite the concern about fees, the NEPC paper says, “we believe managed accounts can deliver high quality and efficient investment portfolios for participants.”
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Still, the NEPC paper points out that fiduciaries have a responsibility to understand how asset allocation in managed accounts is determined. “The usage, application and magnitude of personalization factors increasingly hinge on the approach of each provider. Furthermore, most providers seem to rely heavily on a single factor that shapes much of their portfolio construction methodology.”
Click here to continue reading the full PLANADVISER article.
Pensions & Investments: Private markets haven't cracked the 401(k) code. Empower thinks it's found a way.
NEPC was recently quoted in Pensions & Investments discussing the challenges and opportunities of integrating alternative investments into defined contribution plans. View the full article on Pensions & Investments’ site here or read excerpts below.
Empower’s decision to offer alternatives investments to defined contribution participants faces challenges in an industry that, researchers and consultants say, avoids such investments due to concerns about cost, transparency, liquidity and participant interest.
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Although each managed account provider is different, NEPC reported in February that DC industry trends are squeezing such services.
“We find U.S. DC plans are becoming increasingly passive (and) this shift is driving more plan assets into publicly traded global stocks and bonds,” the report said.
“This growing constraint affects both managed accounts and target-date fund providers alike,” NEPC said. “Over time, as these investment solutions become more commodity like and less differentiated, competition is likely to focus increasingly on price.”
Last year, NEPC “began to see a shift in plan sponsor sentiment, with plans actively terminating managed accounts services due to stalled fee negotiations,” the report said. “This change is occurring at a much faster rate than providers had anticipated.”
Managed accounts remain a small portion of DC plans, according to a March review by NEPC of fees. Although 46% of plans offered managed accounts, only 9% of participants used them, accounting for 8% of total plan assets.
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The NEPC survey was based on interviews with 14 record keepers, covering 278 plans from 137 clients with aggregate assets of $408 billion and 3.2 million participants.
Click here to continue reading the full Pensions & Investments article.
Crain Currency: Dos and Don’ts for Family Offices Getting into Direct Investments
NEPC’s Karen Harding was recently quoted in a Crain Currency article, where she shared insights on the importance of thorough due diligence and setting realistic expectations when family offices pursue direct investments. Visit Crain Currency to read the full article.
As more family offices shift toward direct investments in private companies, experts say success depends less on capital and more on preparation, discipline and knowing what not to do.
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“Is direct investing right for you?” said Karen Harding, partner and private wealth team leader at Boston-based advisory NEPC. “It might or might not be the best approach — it depends on their asset class and their interests and goals, as well as their staffing and skill set.”
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Relationships should be approached strategically, not casually. Harding and Lee both warned about what Lee calls “country club” investing — informal deals made through social ties, without diligence.
Click here to continue reading the full Crain Currency article.
Pensions & Investments: Financial advisory firms go from ‘among the worst to first’ for 401(k) rates of return. Consultants weigh in on why.
NEPC’s Bill Ryan was quoted in a recent Pensions & Investments article exploring the standout performance of 401(k) plans in the financial advisory industry in 2023. He offers perspective on the factors behind the industry’s strong returns and participation rates. View the article on Pensions & Investments’ site here.
It’s not easy to jump from the near bottom of the list to the very top, but the financial advisory industry did just that in the rates of return their 401(k) plans delivered for their employees.
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Bill Ryan, partner and defined contribution team leader at NEPC, is skeptical that more aggressive plan menus — or those offering more equity investment choices — played a role in the ranking.
“Despite some industries offering a broader spectrum of investment choices, the number of options doesn’t determine how participants invest,” he said, citing NEPC research that while 74% of employers offer 11 or more core investments, participants choose only three to five.
“A large menu doesn’t necessarily equate to an aggressive plan,” he said, adding that some core menus offer more than 20 equity options.
In Ryan’s view, a more likely explanation for the outperformance of financial advisory firms is that some industries are simply more risk tolerant than others and therefore see greater returns during market upswings.
“Professionals in finance, accounting, law, engineering and medicine tend to exhibit a greater comfort level with the short-term fluctuations inherent in equities,” Ryan said.
Click here to continue reading the full Pensions & Investments article.
Barron's: The Fed Has 3 Tools to Fight Tariff-Related Inflation. All Have Drawbacks.
NEPC’s Jennifer Appel was recently quoted in Barron’s, offering her insights on how inflation pressures and tariff policies could shape the Federal Reserve’s interest rate decisions. View excerpts below or visit Barron’s to read the full article here.
The Federal Reserve has spent the past three years proving it can bring inflation down through tighter monetary policy. But President Donald Trump’s sweeping Liberation Day tariffs could spark a new kind of inflation that the Fed is less equipped to handle.
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If inflation persists and expectations start to drift, the Fed may be forced to act anyway, tightening policy not because of confidence in its ability to bring prices down, but because failing to act would do more damage to its credibility.
But that decision won’t be easy. “Tariffs have brought about so much uncertainty on both ends of the Fed’s dual mandate,” says Jennifer Appel, principal and senior investment director at NEPC, an investment consulting firm. “If we start to see those job losses come through, there is a risk the Fed will already be behind the curve.”
PitchBook: Elite University Endowments Confront a ‘Parade of Horribles’
NEPC’s Colin Hatton was recently quoted in a PitchBook article exploring how elite university endowments are facing pressure from underperforming private markets, rising costs, and political scrutiny. He highlights the need for diversification and suggests endowments may need to adjust asset allocations as private equity returns decline. View excerpts below or read the full article on the PitchBook site here.
Endowment investment teams at top universities are exploring options to cash out of some of their public market investments, primarily through hedge fund redemptions, to compensate for federal funding cuts and prepare for potential tax increases.
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“With greater levels of uncertainty, you want to understand what your liquidity needs are going to be,” said Colin Hatton, a principal at LP consultant NEPC, where he advises endowments and foundations.
Hatton said his firm is advising clients to keep sufficient capital in safe-haven assets, and in some cases, to take out lines of credit on their portfolios for more liquidity.
FundFire: How Michigan State’s Endowment Outperformed the Ivies
Kristin Reynolds of NEPC was recently quoted in a FundFire article offering a cautionary perspective on MSU’s tech concentration, noting potential risks from overexposure to large-cap U.S. tech stocks amid rising market volatility. View excerpts below or read the full article on the FundFire site here.
Michigan State University’s investment returns beat many elite endowment peers for the fiscal year ending June 30, 2024.
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“Endowments with high public equity U.S. tech exposure performed exceptionally well over the past two years but are likely facing challenges in the current market,” said Kristin Reynolds, a partner at NEPC.
NEPC has diversified U.S. tech exposure with value-oriented stock, Reynolds said. “Conversely, non-U.S. equities have been performing better,” she added.
Pensions & Investments: TIPS making a comeback for ETF investors
NEPC’s Phillip Nelson was recently quoted in a Pensions & Investments article highlighting TIPS as a key tool for real rate exposure, notes that breakeven rates are currently high, and says clients are increasingly looking to TIPS for diversification and liquidity. View the full article on Pensions & Investments’ site here.
Amid heightened volatility and economic uncertainty, the market for exchange-traded funds holding Treasury inflation-protected securities has rekindled after three consecutive years of outflows.
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“From an allocator’s long-term perspective, TIPS is a favorite asset class for real rate exposure,” said Phillip Nelson, partner and head of asset allocation at investment consultant NEPC. “As a rough target, we look at TIPS holdings equal to the size of a Treasury allocation or relative to investment-grade exposure.”
Nelson has observed, however, that 5-year and 10-year breakeven rates are “currently a little rich.” Breakeven rates are the spread between nominal Treasuries and TIPS at constant maturities.
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“Over the last month and a half, we’ve received a lot more questions on TIPS given the uncertainty of the tariff regime,” said NEPC’s Nelson.
“Within our OCIO business, clients want to know if they have enough liquidity to meet cash flow needs. They are looking to get more diversified, add fixed income, and allocate slightly more to TIPS.”
Click here to read the full article on the Pensions & Investment site.