What investment issues keep you awake at night?
Trevor Castledine, senior director – private markets, bfinance: I am concerned about mainstream private debt keeping unviable companies alive, especially while supporting profitable exits for equity investors. There may be too much money chasing too few good deals in certain sectors of the market and new transactions being written which will be reliant on refinancing, not company cashflows, to get principal returned to investors. I’m restless about finding genuinely differentiated offers in the private debt space.
Todd Cohen, director, New York Presbyterian Hospital: As the rally continues and future market gains surge forward, I’m concerned about what this means for the future return environment.
Richard Coldwell, director responsible for fund investments, British Business Investments: I hope the learnings of past cycles are not lost and that managers maintain their standards in credit selection.
Jim Grossman, CIO, Pennsylvania Public School Employees’ Retirement System: Low expected returns for the next 10 years and high valuations.
What surprised you most in 2019?
TCa: The amount of money raised for speculative ‘opportunities’ funds was perhaps a bit surprising. It also surprised me – although perhaps it shouldn’t have – that the money raised for performing private debt strategies was so concentrated among a very small number of very similar offerings. I hope these things are not indicative of unsophisticated – or reactive, rather than proactive – decision-making among the investor community.
TCo: The strength of the bond rally and US Federal Reserve rate cuts surprised me in 2019. I expected a much more neutral environment in both.
RC: As a Sheffield United fan, I didn’t think we would ever make it back to the Premier League. On a professional level, despite the various challenges in the world, I was still surprised that fundraising continues to be a challenge for many smaller managers.
JG: The performance of the US equity market.
What’s the biggest challenge in 2020?
TCa: For investors, maintaining diversified global exposure with the right risk-reward characteristics will require conscientious effort. Re-upping with existing managers should be an active decision having reviewed the market, not a passive one. For managers, being tough with equity investors on problem positions is going to be challenging and may highlight a weakness in the ‘sponsor-led’ market if new dealflow depends on too much compromise on exiting deals.
TCo: The ability to navigate uncertainty – elevated valuations, election year, ongoing trade war – will continue to complicate investors’ ability to be convinced on any market strategy asset class.
RC: For managers to maintain discipline at this stage of the cycle.
JG: The largest challenge for PSERS, with a limited private equity budget for commitments, is deciding which PE funds in the market to say “no” to. We have said “no” to some very promising funds in the market.
What’s your one piece of advice for fund managers?
TCa: To allocators – take the time and advice to understand the whole market and invest through the cycle where the supply and demand dynamics are in your favour. To fund managers – hold discipline. It’s better to miss a deal with poor characteristics than to explain to your clients why you lost their money doing something you promised you wouldn’t.
TCo: Put money to work, but don’t feel pressured to do so. GPs and LPs get frustrated when capital isn’t called as expected, but we should all be cautious. Patience will be rewarded.
RC: Focus on portfolio monitoring. Close management of investments, particularly those that are underperforming, is a key driver of returns.
JG: Don’t get greedier with fund economics – ie, don’t raise your management fee, drop your preferred return, etc.
What are the most promising regions and strategies in 2020 and why?
TCa: Junior positions in carefully constructed collateralised loan obligations will generate good lifetime outcomes if some volatility can be tolerated. Lending to smaller companies or secured on real assets seems under-supplied and therefore likely to give good risk/return characteristics. I believe that the UK will deliver good returns, having been shunned to an extent due to Brexit uncertainty, and that some emerging market strategies will start to gain the traction they deserve. Having said that, I would always advocate maintaining a balanced portfolio.
TCo: I expect there to be some pockets of value in certain US-focused asset-backed credit products.
RC: I am UK-based so you might expect me to say this, but the UK is a great place to do business. With the prospects of a settlement on the Brexit issue and greater political stability, hopefully returns in 2020 will not lag other markets.
JG: PSERS has had the best recent PE performance from our US funds. I continue to believe the best opportunity for PSERS is in the US, although we have some nice opportunities to invest in Western Europe too. Being a dollar investor helps currency-wise too with our US commitments. We expect returns to be diverse, but the best performers will continue to do well.