Back to School: Investors like small funds, emerging markets

  • Commonfund’s AUM: $25 bln
  • Whom to contact: Kate Sylvester,
  • Why is this important: Investors have faith that PE will perform well, despite market changes

Institutional investors love PE and say small funds and emerging markets managers present the best opportunity today.

That’s according to a Commonfund survey, which included 200 investors from endowments, foundations and public pensions. Responses came in March at the 21st annual Commonfund Forum.

The survey showed 31 percent of respondents felt emerging markets represented the best opportunity, while 28 percent saw smaller buyout funds as a top strategy.

“The relative strength of the U.S. economy and compelling returns in domestic private equity have naturally led investors to view that as an attractive investment opportunity,” Mark Hoeing, managing director at Commonfund Capital, said.

Emerging markets and small buyout funds “focus on the earliest stages of company building and enduring private capital strategies, which build companies to become the feedstock for innovative add-on acquisitions by large corporations, larger buyout firms or the mutual fund complex via the IPO exit,” Hoeing said.

Small buyout funds have become so popular that many established firms have launched them, including TPG, which raises Growth funds that are smaller than the firm’s flagship pools.

Vista Equity Partners in 2017 raised $560 million for its first Endeavor fund, which invests in the small side of the market, while Thoma Bravo launched its small-cap focused Discover fund a few years ago.

Institutional investors’ appetite for private markets does not appear to be hurt by their relatively negative perception of the economy.

More than a third of endowments (34 percent) said a decline in consumer confidence could cause the bull market to end, followed by 18 percent and 17 percent of investors, respectively, thinking trade wars and higher interest rates would end the 10-year bull market.

The end of the public markets’ historic bull run isn’t expected to majorly affect private markets because of the long-term nature of such investments.

“[Investors] understand that these are long-term commitments, often 10 years or more, and so they generally will look past shorter-term economic or market trends when considering private capital commitments,” Hoeing said. He expects commitments to be more selective and benefit small buyout funds and emerging markets.

In November, the company launched a diversity office to help promote racial and gender diversity in its “investment process; thought leadership, and professional and organizational development,” Tony Ialeggio, Commonfund’s chief marketing officer, told Buyouts.

Commonfund also surveyed respondents on diversity, with 58 percent saying diversity in their organization’s internal culture and investment strategy is important for success. Only 3 percent said it wasn’t critical to their success.