Secondaries, distressed debt see uptick in LP interest – survey

In infrastructure, renewables was the top sub-sector attracting LP interest, followed by telecoms and digital infra.

Institutional investors appear to be shifting their investment strategies amid the coronavirus pandemic to focus on distressed debt opportunities and secondary investments, according to a survey conducted by the San Francisco-based placement agent Probitas Partners.

Fifty-five percent of survey respondents – a sample size of 79 global LPs – said in April that they are interested in exposure to distressed debt or special situations investment strategies, a 19 percent increase compared with the same time last year, according to results Probitas Partners published on Tuesday. Interest in secondaries investments also increased, from 58 percent to 67 percent.

Those two strategies are the only alternative asset classes in which interest grew compared to last year, highlighting an opportunistic approach some investors may be taking to invest in repriced assets facing new economic realities amid the coronavirus pandemic.

At the same time, however, travel restrictions may make it more difficult for GPs to take advantage of opportunistic situations, a key difference compared with the global financial crisis.

“There is grit in the system preventing those with liquidity from deploying it,” one respondent said.

Real estate and private debt tied for the largest decrease in interest, falling 9 percent each to 27 percent and 37 percent, respectively.

Overall, survey respondents indicated that the majority of investors plan to continue fund allocations amid market volatility, albeit cautiously. Sixty-five percent said they are actively seeking new investments across alternatives, and 44 percent said they will still invest but only with existing managers.

While 29 percent of LPs said they are focusing on moving forward with commitments that are in the advanced stages of due diligence, only 8 percent said they had “temporarily paused” their investment strategies.

“There have been a fair number of closes over the past six to eight weeks, but most of those are with funds that are well along the way toward a final close,” Kelly DePonte, a managing director at Probitas Partners, said during a webinar hosted by the Investment Management Due Diligence Association.

In infrastructure, renewables was the only sector in which over half of respondents said they are interested in targeting, and digital assets, which Probitas Partners included in the survey for the first time, received interest from 39 percent of investors, making it the third most sought-after sector, after telecoms. The transportation sector, which has been hit hard by the pandemic, received only 32 percent interest, falling to fourth place from second in a Probitas Partners survey published last October.

Investors seemed split about how they are handling new work-from-home policies during the pandemic. Sixty-one percent said they have adjusted policies to allow for video or teleconference meetings with existing managers, while 29 percent said that policy is allowed for all managers.

LPs expressed “slight increases” in prioritising environmental, social and governance issues when fund managers are investing, DePonte said during the webinar, but it was not a “wholesale movement” and depended largely on geography, with 58 percent of investors based in Europe, and only 30 percent in North America, saying they are pursuing funds with strong ESG policies.

In almost a complete reversal, 58 percent of North American LPs said they are focusing on fund managers with strong historical track records and 33 percent of investors in Europe agreed.