LP Perspectives 2020: On the minds of the top LPs

What investment issues keep you awake at night?

Raphaëlle Koetschet: Very early processes that move at a lightning pace, metrics that require more and more scrutiny, harsh negotiations along the way: LPs have seen better days.

Jim Grossman: Low expected returns for the next 10 years and high valuations.

Todd Cohen: As the rally continues and future market gains surge forward, I’m concerned about what this means for the future return environment.

Todd Cohen, director, New York Presbyterian Hospital

Cohen oversees the venture and growth equity portfolio for the Office of Investments, as well as making direct investments through the hospital’s venture capital arm, NYP Ventures. The New York Presbyterian Hospital manages around $9.5 billion of assets supporting capital expansion projects, research and development activities across the hospital system. Cohen featured on our inaugural 40 Under 40 list of future leaders in private equity earlier this year.

“As the rally continues and future market gains surge forward, I’m concerned about what this means for the future return environment”

What surprised you most in 2019?

RK: When an egg picture became the most liked photo on Instagram. Other than that and the ever sky rocketing prices for good quality assets, the need for GPs to be (too?) innovative in order to adapt to an overabundance of capital (minority funds, long term funds, buyout funds moving to growth)

JG: The performance of the US equity market.

TC: The strength of the bond rally and Fed rate cuts surprised me in 2019; I expected a much more neutral environment in both.

Jim Grossman, CIO, Pennsylvania Public School Employees’ Retirement System 

Grossman is responsible for management and administration of the investment program at the $55 billion Pennsylvania Public School Employees’ Retirement System, which has a 16 percent target allocation to private equity. Recent commitments include $150 million to Summit Partners Growth Equity Fund X, $75 million to Sante Health Ventures III, and $75 million to Sante Health Venture IV.

“Very early processes that move at a lightning pace, metrics that require more and more scrutiny, harsh negotiations along the way: LPs have seen better days”

What’s the biggest challenge in 2020?

RK: Low growth, low yield, the tremendous growth of private capital, high valuation and volatility could persist for longer than planned. That’s not an easy environment to invest into. I believe portfolio construction should be emphasised more than ever. Diversifying funds across sectors, deal size, investment thesis and consistent deployment across vintage years is key. Besides, GPs should prepare their existing portfolio for the clouds arriving on the horizon.

JG: The largest challenge for PSERS with a limited Private Equity budget for commitments is deciding which PE funds in the market to say no to. We have said no to some very promising funds in the market.

TC: The ability to navigate uncertainty — elevated valuations, election year, ongoing, the trade war — will continue to complicate investors ability to be convicted on any market /strategy asset class.

Raphaëlle Koetschet, head of funds investment – private equity, Caisse des Dépôts

Koetschet joined Caisse des Dépôts in 2014 as an investment director. She was promoted to head of fund investments after five years in the role and now covers buyout, growth equity, infrastructure, real estate and mezzanine. Named on PEI’s Future 40 list earlier this year, she is excited about strategies that have a “clear value focus” be it transformative buy-and-build strategies or growth equity, which, she says, offers buyout-like returns without the need for high leverage.

“Low expected returns for the next 10 years and high valuations”

What are the most promising regions and strategies in 2020 and why?

RK: The world is changing and there is no going back. Changes in the global trade framework, ageing of population, digital transformation, urbanization that leads to an increasing usage of the sharing economy. Some sectors do have strong tailwinds which are usually fully priced. Rather than specific regions or sectors, above all, it’s about selecting the best-of-breed managers. We expect returns to diverse but the best performers will continue to do well.

JG: PSERS has had the best recent PE performance from our US funds. I continue to believe the best opportunity for PSERS is in the US, although we have some nice opportunities to invest in Western Europe too. Being a dollar investor helps currency-wise too with our US commitments.

We expect returns to diverse but the best performers will continue to do well.

TC: I expect that there to be some pockets of value in certain US-focused asset-backed credit products

What’s your one piece of advice for GPs?

RK: LPs are increasingly looking beyond the financial performances and are aiming to have a positive impact on society at large through their PE commitments. The question now for a number of LPs is not whether a GP is capable of achieving a high multiple anymore. It’s also about how this return is made and what or who it can impact. GPs should be strategic about that and not reactive.

JG: Don’t get greedier with fund economics (ie, don’t raise your management fee, drop your preferred return, etc).

TC: Put money to work, but don’t feel pressured to do so. GPs/LPs get frustrated when capital isn’t called as expected, but we should all be cautious. Patience will be rewarded