Fiddich Review Centre
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2022 Risk Management Conference: How institutional investors can power an investment program from strategy to implementation and oversight

Read: A look at the practical challenges of meeting target allocations in private markets

It’s paramount for institutional investors to invest in private markets across both time and sector, said Spencer, citing the differences in returns between venture capital and buyouts.

“Do you want to have a lot of exposure to venture capital, which is obviously going to help your returns? That’s been really one of the best performing parts of the private markets arena over the course of the last 10 years, but that hasn’t always been the case. Looking at buyout, the risk profile is different and returns tend to be more consistent.

“In addition, then you’ve got things like infrastructure and private credit which have differing return profiles again, so just be mindful of what the underlying risk and return characteristics are of those strategies and making sure that’s aligned with what your strategy is.”

He also suggested investors be aware of the dispersion of returns in private markets compared to public markets. “If you look at private markets, the dispersion between the top quartile manager and the managers performing in the bottom quartile, can be in the order of 30 per cent. Contrast that to traditional equity or fixing account managers with a spread between the top performing and the bottom performing managers, it’s maybe about 200 or 300 basis points. . . . It’s very important that [investors conduct] appropriate levels of due diligence, so you’re giving yourself the best opportunity, the best chance to invest in high performing managers.”

Read: Governance at core of success in CAAT plan’s shift to private markets

Shifts in supply chains caused by increased geopolitical tensions will also increase investment opportunities in private markets, said Spencer. “This is going to be one of the key trends, we think, particularly over the course of the next 10 to 20 years as companies, particularly in North America, are going to want to bring their supply chains back to places like the United States, Canada and Mexico.

“That has really important implications and opportunities for specialist small- or mid-market buyout firms, particularly those focusing on [sectors such as] high-end manufacturing.”

And for institutional investors considering private credit, he noted, it’s important to focus on managers that are investing in sponsor-backed loans. “[If you get] a loan that starts to go wrong or there’s issues, the management teams [and] the operating partners are in a much better position to take remedial action and maximize the value of those investments and protect the interests of the lenders.”

Read more coverage of the 2022 Risk Management Conference.

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