LPs move past valuation concerns to focus on opportunities

Institutional investors want to avoid mistakes they made post-GFC and are looking to capitalise on investment opportunities working around covid-induced limitations, finds Probitas’ latest survey.

Conversations institutional investors are having with their fund managers have shifted from concerns surrounding portfolio valuations and liquidity issues to seeking out attractive investment opportunities, Probitas Partners found in its most recent survey, a follow-up to one in April.

The San Francisco-based placement agent stated in its report, published this week: “Even with these concerns, LPs continued to invest, looking to avoid mistakes made during the Great Financial Crisis when many institutions dramatically slowed investing to manage the impacts of the ‘denominator effect’ on their portfolio allocations – resulting in their missing investment opportunities as the market re-bounded.”

The asset class that emerged as the favourite alternatives sector, among the 60 institutions surveyed between 2 September and 17 September, was mid-market buyouts (81 percent), followed by distressed debt/special situations strategies (45 percent).

Infrastructure, which came in a close third with 40 percent, enjoys strong investor appetite, especially the renewables and digital infrastructure sub-sectors, Probitas said.

From a geographic perspective, North America came out on top as the preferred investment destination for all respondents regardless of their base of operations. Western Europe ranked second, with the UK third.

Emerging markets scored low overall, but Probitas noted no respondent chose Brazil, sub-Saharan Africa or Middle East/North Africa as targeted regions. “Interest in closed-end funds in emerging markets has never been strong in our past surveys, but this result was striking,” the firm said in the report.

Location, location, location

Geography also played a role in investor attitudes.

For example, while all respondents are actively investing – compared with 8 percent who had paused investments in April – 43 percent of European investors are actively looking at new opportunities, investing with fund managers with whom they have no prior relationship, while only 36 percent of North American and 25 percent of Asian investors are doing so.

Stark differences based on geography also emerge with respect to due diligence policies and practices. With travel restrictions being more relaxed in Europe during the summer months, 50 percent of European respondents said their offices were open for business with in-person meetings taking place compared to just 4 percent of North American respondents.

The geographic differences continue when it comes to environmental, social and governance, and diversity-related matters. While focus on ESG investing increased overall compared to Probitas’ April survey – from 46 percent to 58 percent – the increase was not uniform across regions.

The majority of European investors (79 percent) said their firm was actively pursuing funds with strong ESG policies, while only 44 percent of North American investors said so. A larger percentage of European investors said they are actively pursuing investing in minority- or women-owned funds than their North American counterparts, while GPs’ track records were a more critical factor for North American investors than European LPs.

Asian responses fell somewhere between the two, Probitas said.

Forecast fatigue

While one third of respondents in April predicted that the pandemic would be under control by September, nearly half of those surveyed in September – 47 percent – said they are not making any definitive forecasts at the moment. Others have adopted longer timetables: 30 percent expect a series of waves over the next 18 months; 21 percent forecast a five-month horizon; and only 2 percent expect covid-related disruptions to end in two months.

Investors’ greatest investment fears related to covid, also differed by geography.

For example, 64 percent of European investors are much more worried about the impact of shutdowns on supply chains and industrial operations that could lead to economic difficulties compared with 30 percent of North American investors and 40 percent of Asian respondents.

The investment fear respondents scored as their biggest was fairly consistent regardless of geography: that the world will continue to see outbreaks – either globally and/or locally – in waves over the next 18 months, resulting in lockdowns and re-openings that will have long-term effects on the economy.