Investment Spotlight: Where Investors Are Looking for Future Performance

As the alternative investment market is ever-changing, especially during uncertain times in the world, many investors and allocators are rethinking their investment strategies and how they allocate their capital. EisnerAmper’s 7th Annual Alternative Invest Summit, Raising the Curtain: The Next Act for Alternative Investments, which took place on September 21- 22, 2022, addressed this timely topic.  In a panel discussion titled “Investment Spotlight: Where Investors are Looking for Future Performance,” the following panelists focused on important issues that fund managers and investors should be looking at when it comes to investments in this market:

• Kane Brenan, CEO, TIFF Investment Management;
• Brett A. Hickey, Founder & CEO of Star Mountain Capital;
• William Kelly, President & CEO of CAIA Association; and
• Jennifer Cuello, Partner, EisnerAmper (moderator)

They discussed the following themes:

Emerging Trends: How Should They be Analyzed

In deciding whether to invest when considering an emerging trend, the fundamental investment principals are the same as any other investment decision. Investors must consider their risk tolerance, match the duration of their liabilities to the duration of their assets, and focus on strategies with the highest probability of providing the desired objective. All panelists agreed that diversification of the portfolio is key and emerging trends should be considered as part of the diversification. One approach discussed was to look to frame the macroeconomic trend first and then look at the emerging trend: for instance, trends related to aging demographics in the United States, with many businesses that are family-owned and have non-financial reasons for transacting.

Beginning with the macro factors as a basis helps maintain stability when considering the emerging trend. The constant challenge with emerging trends is there are two differing views, one being the opportunity to be a first mover to create the most appreciation; the other being not wanting to jump into a quick, hot environment which could ultimately fizzle out.  

Key Trends Expected for 2023

There have been discussions around the traditional 60/40 allocation strategy and ways to seek alpha through other means. Greater access to alternatives is giving investors more options, but just because a private equity or hedge fund is employing a particular strategy does not mean that an investor will invest. As it relates to emerging trends in particular, managers will need to be able to demonstrate deep sector expertise as a differentiator rather than taking a generalist approach. Certain emerging trends mentioned in the panel included green energy, carbon credit, biotech, credit strategies and new technologies on the blockchain. Areas of concern include fixed income given the higher interest rate environment, as well as commodities. In addition to a manager’s expertise, alignment of interests and a clear focus are key. Investors will review these areas as well as cybersecurity and ESG issues during the due diligence process.

ESG- How it’s Incorporated in Investment Decisions

ESG considerations are top-of-mind for many investors and impact the entire organization, from the fund level down to the portfolio companies themselves. Weak governance at any level can lead to investment depreciation. It is also important to recognize that while ESG factors are critical to consider, implementing change in these areas is a process and can take time. Panelists said they consider ESG factors at the fund level by aligning the interest of the fund’s employees through carried interest incentives, when making investment decisions through their due diligence process, and by implementing ESG initiatives at the investment level itself. One example is when investing in family-owned businesses, assisting them in cultivating a board made up of members with diverse and proper experience in the industry.

Key Considerations for Investment Success in the Short and Long Term

With such uncertainty in the world right now due to geopolitical and economic factors, one strong point the panelists mentioned is having a strategy and sticking with it. Create a strategy based on macro trends and develop an approach to create and protect that value in the long term. 

The panelists mentioned other factors to keep in mind when making investment decisions: watching whether each allocator is using their full risk budget, investing in managers that are focusing on impact for their portfolio companies, and reviewing the board of directors/management of each opportunity to get an understanding of their qualifications and sensitivities. Ultimately, a fund that understands their unique value proposition, has a clear and defined business plan and strategy, and is able to communicate that to investors will most likely have greater success.

Looking ahead, the panelists expect that these aspects will continue to be a focus for capital allocators and funds for the future.

To view the panel, click here.