Press

“In a time of rising market uncertainty, sophisticated investors are making strategic shifts in their portfolio allocations to navigate an evolving investment landscape. After two years of double-digit outperformance in public equities, it is not surprising that investors are looking to increase their exposure to private markets, seeking diversification and perceived stability. However, this trend is not without risks, as private market valuations can create an illusion of security in an environment where liquidity constraints may be mounting.”

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“Additionally, consulting firms like NEPC have warned investors about potential valuation declines in private equity and venture capital. Many firms have avoided markdowns by opting for insider rounds and bridge financing to maintain valuations, but mounting liquidity pressures remain a concern.”

Investors in the infrastructure space need to be aware of the risks of the asset class as they look to meet the tailwinds of the energy transition and digital infrastructure, Matthew Ritter, partner and head of real assets at US-based LP consultant NEPC, told Infrastructure Investor.

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“I think there’s really attractive opportunities for investing in infrastructure today across the board, particularly in some of these themes, ” he said. “At the same time though, I think it’s really important that investors be aware of the risk profile of what they’re investing in.

“There are strategies that are much more at the secure end of the spectrum with long-term contracted cashflows with credit counterparties, and then there’s strategies that are a little bit more private equity-like. I think there are attractive opportunities across that spectrum, but it’s important to make sure that you understand what you’re investing in and that it aligns with your goals and objectives.”

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“As these themes have garnered a lot of interest, there’s been a lot of new entrants or managers launching new strategies to capitalise on these themes, ” Ritter outlined. “Some of which may call themselves infrastructure, but might actually look more like a private equity strategy in terms of the underlying risk and return profile.

“So, while total return is something we are mindful of, of course we want to be thinking about the risk that you’re taking. Is a strategy really taking on commercialisation or technology risk in a way that is not suitable for an infrastructure portfolio? Those are things we’re thinking about as well.”

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“A lot of commitments were made last year, but there is definitely a subset of investors that, just by their exposure through other private markets – whether it’s real estate, private equity or other areas – there’s been decreased liquidity in the market and therefore they’re getting fewer dollars back, ” he reasoned. “That has certainly constrained their ability to make new investments to some degree.”

Private equity has been tested in recent years: Investors earned strong returns on stocks while PE struggled and alternative managers and investors couldn’t even agree on valuations. All of this has prompted a flight to safety, with investors committing most of their capital to the largest, brand name funds last year.

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“I believe there’s more pain to come in venture capital marks,” Samuels told Institutional Investor.

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“There’s a lot of goodwill that’s been destroyed between GPs and LPs,” Samuels said before adding, “I’m a little worried about some of the dollars in the ground today for further down marks.”

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Within buyouts, NEPC isn’t seeing deals happen fast enough due to “an impasse between buyers and sellers.”

“They don’t want to meet on price,” she said. “The sellers don’t want to come down, the buyers don’t want to come up further.” Samuels added that the IPO market is open, but private companies need to be properly priced before going public.

While defined contribution retirement plan sponsors have increasingly showed interest in offering more personalized retirement investments to their participants, widespread access to managed accounts has yet to be achieved.

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“However, a recent NEPC paper found that high fees tend to erode the value of managed accounts, as a fee of 30 basis points typically requires a participant to increase their equity exposure by 20% to 30%, or by two to three TDF vintages, to achieve a similar net-of-fee return. In addition, for participants paying a lower fee of 15 basis points, for example, NEPC argued that they could anticipate returns comparable to a typical TDF investor. Even with the advice component of managed accounts, NEPC found that the added value of that feature declined over time.”

U.S. retirement plans in Pensions & Investments’ latest annual survey reported their strongest gains in three years, even as the portfolio payoff from diversification hit an air pocket and persistent equity market dominance by a handful of U.S. tech giants continued to dog investment teams.

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Aaron Chastain, an Atlanta-based principal and corporate solutions leader with NEPC, said the steady appeal of private credit likely reflects its relatively attractive balance of risk and returns. “A lot of particularly large plan sponsors … still have return needs for their growth portfolio but are wanting to incrementally derisk as they get better funded. I think we’re seeing a little bit more focus on private credit as that middle ground,” offering high returns with both superior safety and shorter duration than something like private equity, he said.

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NEPC’s Chastain said that urge to diversify away from an overconcentrated S&P 500 index has led clients to seek out more active strategies with less reliance on the Mag Seven, including global equity strategies offering broader opportunities to seek alpha.

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Chastain said with credit spreads over Treasuries narrowing last year, some investors have concluded that they’re no longer getting paid to hold credit. Switching into passive Treasuries leaves them positioned more cautiously to lean into credit again in the event of market dislocations.

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The UC San Diego Foundation, which runs $1.6bn, topped the performance charts with a 15.5% gain in the year to mid-2024 as smaller endowments outperformed their bigger peers.

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“Since late 2022, public large-cap equities in the US have been the performance leaders, spurred by exceptional gains for large technology corporations at the forefront of the AI revolution,” said NEPC, which compiled the annual ranking.

“This trend has been of great value to smaller and mid-sized endowments with higher US large-cap exposure.”

The top-performing university and college endowments in fiscal year 2024 had high exposures to public companies assisting in the artificial intelligence revolution, according to an NEPC report released Jan. 14.

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For a second consecutive year, the largest endowments mostly trailed behind their smaller and mid-sized peers — particularly those with more exposure to public equities, wrote Colin Hatton, principal and senior consultant at NEPC’s endowments and foundation practice.

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And while “it’s often true that compelling new technologies arise in the private markets first, which is a reason why the mega endowments have historically outperformed,” longstanding, U.S.-domiciled public companies such as Nvidia, Amazon and Microsoft have been responsible for 24.6% of the S&P 500’s gains, Hatton added.

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Although AI drove strong returns for large-cap U.S. stocks, Hatton noted “we’re not convinced this is a trend with staying power.” He added it may be hard for technology firms to outperform earnings expectations to support high valuation multiples, which have contributed to their gains so far.

In fiscal 2024, university endowments followed a similar trend as the prior year: Endowments with a higher allocation to equites were top performers, while endowments with higher allocations to private markets often saw single-digit returns.

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The median endowment, out of 78 endowments NEPC tracked, returned 11.9% in the fiscal year.

“The [UC San Diego Foundation’s] success stems from a unique approach to endowment management that is a particularly good fit for current market trends,” Colin Hatton, an NEPC principal for endowments and foundations, wrote in the NEPC report. “They utilize several University of California General Endowment Pool accounts, enhancing them with their own strategic position which consists primarily of U.S. large-cap equity. It’s a hybrid approach that allows them to benefit from the University of California Investment Office’s resources while employing an asset allocation that meets their own needs.”

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“We also believe that private equity and venture capital aren’t likely to remain underperforming sectors for an extended period of time,” the NEPC report noted. “Both segments needed to endure a period of repricing in an environment of higher interest rates, but we think that cycle will come to an end now that interest rates are expected to remain stable or come down.”