Beyond Bulls & Bears

Alternatives

Alternative Allocations: Lessons learned from institutional allocators of capital

Franklin Templeton Institute’s Tony Davidow sits down with Mercer Investment Consultant Will Dillard to discuss how institutions are allocating to alternatives, conducting due diligence, and thinking about diversification.

In the latest episode of our Alternative Allocations podcast series, I spoke with Mercer Investment Consultant Will Dillard about lessons he’s learned from institutional allocators to alternatives. Having spent several years working with them, Will shared valuable insights about how institutions allocate capital, conduct due diligence and think about diversification across the alternative investment opportunity set.

We discussed the growing interest in private markets within the wealth channel. Will noted that “. . .  the dispersion between top and bottom quartile managers, it’s much wider than if you were to look at public market asset classes. So, I think aligning yourself with top GPs [General Partners1] who have management teams that have ultimately delivered success for portfolio companies—but also for their LPs [Limited Partners2] —is very important to success within the private wealth channel.”

We spoke about the importance of due diligence, and how it differs from evaluating traditional investments. Will noted that while there are similarities, there are also substantial differences, and advisors need to get comfortable with the firm and its offerings.

Will emphasized the importance of alignment of interests, and how he likes to see managers with “skin in the game.” Specifically, he noted evaluating the historical track record, how managers scale positions and construct portfolios, and their relative performance.

Will commented that “. . .  having that depth of experience, having a track record and really going through multiple market cycles if possible is important.” He went on to share that “. . . typically you’ll see the best-of-the best have some sort of competitive advantage in terms of sourcing relative to others.”

Will shared many great insights as advisors begin allocating more significant capital to the private markets, including evaluating funds, managing liquidity and managing expectations. We discussed the role of alternative investments in portfolios and the importance of diversification across alternatives.

Will and I went on to discuss our respective market outlooks. Will shared that “I do think secondaries3 are an attractive area of the market today, and with the institutions that we work with, a number of corporate pensions are looking to de-risk their plans.” And he noted that “You’re not seeing distributions being able to fund new commitments. So, I do think there’s going to be interesting secondary opportunities, both LP- and GP-led over the coming years.”

Will provided several valuable takeaways for advisors contemplating an allocation to alternatives, for those who are thinking about increasing their allocations to the asset class, and for those curious about where the best opportunities may be in today’s market environment.

Make sure you don’t miss an episode by subscribing to Alternative Allocations on Apple, Spotify or wherever you get your podcast.

 

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.

An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S.: Franklin Resources, Inc. and its subsidiaries offer investment management services through multiple investment advisers registered with the SEC. Franklin Distributors, LLC and Putnam Retail Management LP, members FINRA/SIPC, are Franklin Templeton broker/dealers, which provide registered representative services.  Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com.

You need Adobe Acrobat Reader to view and print PDF documents. Download a free version from Adobe’s website.

Franklin Distributors, LLC

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

_______________________________________________________________

1. In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third-party investors being the limited partners and the PE firm acting as the GP.

2. LPs are the investors into private equity funds which are managed by a General Partner (GP) Like shareholders in a corporation, LPs have limited liability to the extent of their investment and have no management authority.

3. Secondary funds, commonly referred to as secondaries or continuation transactions, purchase existing interests or assets from primary private equity fund investors. For example, a primary private equity fund may purchase a stake in a private company, and then sell that interest to a secondary buyer. Sellers gain liquidity, while buyers may find the portfolio claim or asset(s) attractive.

 

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.