By Steve Cinelli, CrowdFunding Beat Sr. Editor
Those that keep track of investing activities have witnessed large institutional investors allocating larger levels of their portfolios to alternative investments. Driven by a series of internal and exogenous factors, alternatives are no longer an increment of a broader strategy, they have become a fundamental part. According to a recent McKinsey report, those institutions, such as pension funds, insurance companies, sovereign funds with over $10 billion in AUM, the allocation is approaching 30%. Those with less that $10 billion are moving quickly also, nearly 26% of their portfolios are moving into alternatives.
So why is the allocation to alts rising so fast? First off, the public equity market, while experiencing a great run since the financial crisis seems to be a bit frothy, and many pundits suggest a correction is in the offing. The fixed income market has seen an extended low yield environment, and with necessary hurdle rates that pensions need to attain for covering pension payouts, portfolio managers are looking elsewhere. So this is where asset classes such as venture capital, private equity, real estate, hedge funds and commodities, are becoming staples.
Alternative assets are not just a means to attain a bit of alpha, with funds being invested in various funds. Rather, more institutions are investing directly, in part to avoid the economics of certain fund performance which have failed to meet benchmarks, such as the S&P500. With the illiquidity of alts, investors try to better benchmarks, like the S&P500, by 200-300 basis points if not greater. And as we saw recently, the largest pension fund with $300 billion decided to forego its commitment to hedge funds, which were costing $130 million in annual management fees, without producing the sought after return. Increasingly, both large and small institutional investors are building in-house expertise and investing directly, outside the fund model. Heretofore, many investors desire if not require co-investment rights, thus putting additional funds to work absent the management fees and carried interest.
We anticipate this trend of direct investment to continue, and that is where we believe that some variation of crowdfunding becomes a disintermediator. Many institutions are seeking yield so thus allocation to P2P platforms and real estate becomes an attractive proposition. Some are looking at early stage venture platforms with growing inklings of interests. With the developing capabilities of the institutions, it bodes an extreme opportunity for those platforms that offer a comprehensive and valid experience. Good quality investments, proper and deliberate reporting, and of course, attaining an appealing return. With the exception of the last year or so, with high profile exits, venture and private equity returns have been lackluster, and then laden with a typical “2 and 20”, large investors, like CalPERS, are thinking differently. Yes, alternatives have become a fundamental part of every portfolio, but the historical approach may be shifting, and the “crowd” may soon be redefined.
Steve Cinelli is Founder, CEO of PRIMARQ Inc., a paradigm shift in the world of housing finance. Our goal is to bring prudence and opportunity into a fundamentally crucial segment of the US and world economies, namely homeownership. @