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HNWIs, families back off volatility

Following September 11, private investors are holding back on new allocations to private equity and other volatile asset classes.

Following the events of September 11, a number of private investors are looking to reduce their exposure to private equity and other asset classes they now perceive as more volatile.

According to a note circulated by the private equity fund group of Salomon Smith Barney, several high net worth individuals and family offices have suspended near-term plans for deploying fresh capital to private equity and instead have turned their attention to liquidity as an overriding investment consideration. “A ‘wait and see’ attitude among such investors is expected to continue as long as political and military uncertainties remain”, the investment bank said.

The perception of greater volatility in alternative asset classes is said to have had an effect particularly on those investors who’ve already taken a great deal of pain in the public markets over the past two years.

What is described as a “knee-jerk” reaction on the part of these investors could impact the fundraising plans especially of funds of funds, many of whom are managing money for individuals, endowment trusts and families.

One fund of fund manager in London commented that to what extent funds of funds would be affected by the trend would depend on what type of private clients they were offering their services to. “There are a lot of people particularly in the US who thought they were rich and then discovered that there are not. They will be a great deal more affected than families and endowments who have been in alternative assets for some time”, she said.

She also suggested that on the institutional side, allocation levels were unlikely to change much in the short term. “On the contrary, if anything they are increasing, not decreasing”, she said.

The same point is made by Salomon Smith Barney. The bank suggests that large institutions, pension funds and other sophisticated investors are not planning to alter their investment strategies in response to recent events. “[They] cite the fact that private equity’s fundamentals remain unchanged, reiterating the position that they will not attempt to 'time to market' by altering long-term investment plans in response to short-term gyrations in the broader market”, the bank observed.