A diverse panel, consisting of
1> the head of treasury managing a large pension fund,
2> a managing director for alternative investments at a large fund,
3> a managing director for fund raising at a fund with investments as diverse as late stage VC to middle market companies, and,
4> a managing partner at a fund investing in industrials,
can definitely get you to “stress test” your thought processes on investment decision making in a downturn.
Some quick thoughts and questions that came up thanks to the panel:
1> How do GPs prioritize their investments, across investment decisions and portfolio companies?
2> Switching perspectives, how would LPs recategorize their top decile funds in the changed economic environment?
3> Have GPs and their LPs considered restructuring funds (changing terms, size, etc.)? At what point does restructuring a fund become in everyone’s best interests?
4> How are funds, whether buyers or sellers, over forced sales and bargain prices of investments, resetting their expectations, as well as the expectations of their stakeholders?
Note: Bargain prices of investments for buyers mean that to drawdown the fund fully, you may have to make more deals.
5> How do you deal with strategy creep when a fund is investing in earlier vintages? A fund of funds perspective may help, however, how do you build the processes to manage conflicts with style drifts?
6> Are we seeing many buyers in the secondary market for new fund turnover? How does that impact the secondary market discount?
One panelist, from a treasury department, talked about challenges in allocations to meet $800 million worth unfunded commitments with $300 million in payments to retirees. He boldly ventured that Modern Portfolio Theory may be dead. Given the volatility seen in the market, and pension obligations to manage, he stated that long only strategies do not work and pointed out the need to deploy derivatives strategies in the context. My take on this was that this perspective only underscores the complexities of managing risk with derivative instruments.
Another panelist talked about investing in long lived, low technology assets and managing macroeconomic and counter party risks. The fund raiser panelist talked about a 15 billion dollar 2008 fund, that was initially expected to invest about 4-5 billion a year, which was considering cross fund investments (say a fund WP10 looking at existing funds WP9 and WP8), with advisory board approval.
A panelist from a Germany based fund ventured that some of the winners in the downturn were global macro, and long short hedge funds. His take was that specialized funds were doing well. However, he was concerned about the liquidity of the hedge funds as drawdowns were being discouraged.
The panelist was also actively looking at the secondary market, besides private markets for capital. His assessment was that new fund turnover was at 3-5%. Some of the factors in the decision making:
1> Bottom up analysis on investments
2> Asset covenants
3> Secondary market discounts
4> Structured finance solutions to relieve or defer capital call responsibility and future unfunded obligations.
What do you think?
The Usual Disclaimer: This is purely a knowledge sharing resource and I have been careful to protect panelist interests. Ethically, context is everything, and I will gladly retract anything that affects the parties mentioned. Call this my mini OpenCourseWare, if you will, where Open signifies life experiences.