- Why this is important: Smaller LPs use multiple strategies for diversification
Altman Foundation, with $270 million in AUM, wants to build secondary-market exposure as a way to access funds at lower commitment sizes, according to John Townsend, vice president and treasurer.
“If we pick the right manager with the right strategy at the small/low end of the market, or a manager with good proprietary deal flow in the secondary market, we can get diversification and can get in with lower commitment amounts,” Townsend said.
Secondaries would be part of Altman’s more aggressive strategy as it builds up its PE portfolio both with the help of funds of funds and by directly committing to managers.
The New York foundation has invested in PE for almost two decades. It has an actual allocation of 15 percent and commits a total of $10 million to PE funds and funds of funds each year.
It backed away from private equity investing from 2008 to 2012 during the global financial crisis, Townsend said.
At the time, the foundation’s PE allocation shot up as the value of the total portfolio dropped, a phenomenon known as the denominator effect. This led to the portfolio being overallocated to PE, Townsend said.
So the foundation stepped away for a few years, a decision that may not have been totally appropriate. “In hindsight, we should have committed in that period for better returns,” Townsend said.
The foundation will try and be active if a downturn occurs, Townsend said. “If a major downturn in the equity markets occurs again, we may choose to ignore the denominator effect to take advantage of opportunities.”
Of its direct fund commitments — those not through a fund of funds — the foundation especially likes Warburg Pincus, Townsend said. Warburg has a well-diversified portfolio, a great track record and has successfully transitioned from one generation to the next, he said.
Warburg’s funds generated an average internal rate of return of 15 percent, Townsend said.
Altman is drawn hesitantly into fund-of-funds vehicles because of its smaller size, he said.
“We did go in with higher expectations in these relationships, and while we had some success, these investments have not produced quite the returns we had expected,” Townsend said.
But the more attractive funds of funds in which Altman invests have 20 percent to 30 percent dedicated to co-investments, he said.
“We don’t have the internal staff to analyze co-investments, and I don’t have a great deal of confidence in hiring outside consultants to do that work for us,” Townsend said. “Better to simply have the fund’s team do the work and make the decisions.”
Altman was agnostic about market outlook for 2019, he said.
“Fed, China issue, debt ceiling, government shutdown, consumer sentiment: You can get into trouble with all this. We should only be talking managers and asset allocation,” Townsend said.
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