There’s a good chance the LP of the future will take a much more fluid approach to how it structures its investment portfolio, including private equity.
Hayfin’s Mirja Lehmler-Brown points out that, in more mature public equity markets, portfolios that used to be divided into geographies are often structured globally.
“That’s one vertical that’s already gone from separate buckets to one big bucket.”
It’s not a stretch to imagine alternatives portfolios following the same trajectory, providing LPs with a broad pool which they allocate to managers on a global basis – and perhaps even eventually to different alternative asset classes and strategies – based on their risk-return profiles, she says.
“We see directionally two schools of thought potentially capturing the imagination of some chief investment officers and investment programmes,” says TorreyCove’s David Fann.
The first is to combine private equity with public equity, viewing this bucket as all equity risk. The other is to split the portfolio into liquid and illiquid strategies, which would put private equity into a broad private markets bucket with private credit, private infrastructure and some real assets investing. The preference for one over the other is a philosophical one, based on how the investor perceives risk.
Last year the California Public Employees’ Retirement System announced it was considering a merger of its private equity and global equity allocations, placing the asset class in a “growth bucket”. The idea behind the change is that the private equity team would no longer be under pressure to reach a certain target allocation; instead it would focus solely on committing to the best managers.