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Endowments eye special situations, growth equity for 2019

  • Why is this important: Endowments, foundations positive about PE in ’19, with particular attention to special situations and growth equity.

Endowments and foundations are optimistic about private markets going into 2019 and they view special-situations and growth-equity strategies as offering the most medium-term upside, a recent survey by NEPC shows.

Endowments and foundations remain fairly bullish on private equity, although expectations seem to have tempered a bit: 51 percent of respondents said PE would outperform other asset classes and 45 percent were neutral when compared to other asset classes.

Those results reflect the rich valuations of private companies, as well as lowered expectations for returns in general, compared with the recent past, said Sebastian Grzejka, senior consultant on the NEPC research team.

“They just don’t think that returns will be as high as they were in the past,” Grzejka said. “There is still a premium when compared to public equity. It’s just not expected to be as high of a premium perhaps on a go-forward basis.”

Endowments and foundations have shifted their focus within PE compared with last year’s survey. A quarter (26 percent) of respondents said special situations was the strategy most likely to deliver the strongest returns over the next five to 10 years. Regional strategies and growth equity tied for second place with 17 percent each.

The shift away from core buyouts strategies reflects a demand for specialization and the ability to adjust to an evolving market, Grzejka said.

“When you have as rich of a market as you have today, you need some kind of specialization or differentiation in your approach,” Grzejka said.

“Sure, buyouts, venture, secondaries, those things are still expected to achieve some type of return over the next five to 10 years. However, it looks like endowments and foundations are really looking at more specialized managers, more focused managers that can really add a lot of value.”

That was a change from last year, when buyouts and venture were relatively more popular, Grzejka said. But the shift is appropriate for investors who are trying to be nimble while maintaining a long-term view in their investments, he said.

“There are points in time when venture is exactly where you want to be, and there are points in time where special situations are where you want to be, and being able to shift in that and look toward those types of opportunities is important,” Grzejka said.

NEPC conducted its survey in November, after periods of market volatility but before markets fell further in December. The volatility has made alternative assets more attractive to institutional investors, according to NEPC.

Investors were still optimistic in November, with only 15 percent saying the economy was in a worse place overall than last year. But they had a long list of concerns, including rising U.S. inflation, geopolitical tensions, rising interest rates, political uncertainty, Federal Reserve action and the U.S.-China trade war.

Action: View NEPC’s full survey results here: https://bit.ly/2rVGjOn

  • 26 pct chose special situations as strategy most likely to provide the best returns
  • Regional strategies, growth equity also popular
  • As market volatility sharpens, investors look to more specialized GPs and strategies