Fundraising from cradle to grave

As funds look to diversify their investor base, every type of institutional investor can be an option – no matter how unusual they may seem.

Philip Robson, president of Canadian-based investment firm Integrated Asset Management Group, is interested in graveyards. He’s not talking in metaphor – referencing portfolios of struggling companies or non-performing loans – he’s talking literally.

Cemetery operators form part of Robson’s investor base, he told PDI recently. So too does a blood donation research company. These LPs have investment needs that make private debt a good fit. And he wants to find more niche investors of this ilk.

Looking to link up with unconventional investors can allow private debt funds to diversify their capital commitments. Thinking outside the box may be particularly beneficial for newer and more niche managers looking to find investors willing to back left-field strategies.

While the backing of a funeral operator or a medical not-for-profit might seem strange, the investment goals of such institutions have strong alignment with private debt characteristics. Cemeteries are often required to maintain land in perpetuity as plots are bought long before the buyer is deceased. Given this dynamic, higher-yielding fixed-income style investment is an ideal fit.

Likewise, not-for-profit medical organisations need to find ways of funding new research, in the same way university endowment funds do. Given the long-term timeframe often associated with medical research, private debt is a natural asset class for such investors to gravitate to.

The majority of alternative assets are held by pension plans, insurance companies and wealth managers. These three groups make up 60 percent of assets managed by the top 100 alternative asset managers, according to Willis Towers Watson’s latest Global Alternatives Survey, published this week.

But a concentrated investor base can have its downside. Regulation may impact the ability of any one group of investors to make allocations to a given investment vehicle or asset class. A prime example is Solvency II’s impact on insurance companies, which is causing many to rethink certain types of commitment.

Niche investors arguably won’t do a whole lot to solve this concentration issue. There are only so many cemetery operators, for example – and only a proportion of these will consider an allocation to private debt. Returning to Robson’s case, such investors make up about 10-12 percent of the firm’s private debt assets under management.

GPs might also need to perform a clever balancing act when bringing these investors into the fold. How do you manage the expectations of a multi-billion-dollar pension fund alongside those of a small not-for-profit research organisation? How do you deal with the likely education gap between these institutions?

For niche players, however – where the importance of every investor and every dollar committed cannot be underestimated – these unorthodox pools of capital may represent an important diversifying element in their LP base.