The key tenets of our investment philosophy are:
Our primary rationale for investing in the private markets is to generate high absolute returns, or to add incremental return to an overall investment portfolio.
Accompanying the potential for higher returns is higher risk. As an asset class, private markets are riskier than public equity given its heavier weighting towards high growth sectors and younger and smaller companies.
Manager selection is the primary risk in the private markets. Average returns in private markets are not compelling and do not compensate investors for risk.
Risk is managed by equally weighting time and individual commitments, while constraining exposure to strategies, regions, funds and managers.
Private market is a long term asset class, so we take a long term approach to investing and do not seek to time the market based on changes in the short term outlook for the investment environment for any particular strategy.
There are three primary challenges in building a successful private market programs today. First, manager selection is critical to achieving the desired returns given the significant performance penalty if you are not invested in top performing funds. Second, as the private markets have matured and attracted increasing amounts of institutional capital, funds are regularly oversubscribed. Third, fund manager investment performance is not repeatable – meaning, managers do not consistently beat their benchmarks from one fund to the next. We believe the following aspects of our manager selection process serve to mitigate these challenges:
Thinking outside‐the‐box: As with other asset classes, private market investors are often guilty of herd mentality and performance chasing, which may lead to mediocre results. While our client account portfolios are weighted towards proven manager funds, we also believe it is important to continually identify new and emerging manager funds. Such funds have been a significant contributor to our investment results.
Proactive manager coverage: Our investment approach is to continually conduct due diligence as part of our monitoring of existing manager relationships and build relationships with new managers well in advance of their fundraising. Vetting managers in advance of their fundraising has enabled us to successfully position our clients for allocation where we desire.
Forward‐looking analysis: Given that a historic track record is not a reliable indicator of future performance, key to our due diligence approach is to evaluate manager capabilities that have driven past returns and assess whether those capabilities are still present and relevant to continue to drive outperformance in the future.
We advocate establishing flexible investment guidelines to allow for an opportunistic approach, rather than setting rigid targets. Setting rigid targets can result in forcing capital into sub‐asset classes, regardless of whether there are high quality managers in the market. In private markets, risk is managed by equal weighting time (vintage years) and individual commitments and constraining exposure to strategies, regions, funds and managers. We believe this approach to risk management appropriately balances an opportunistic investment approach focusing on the best possible funds with prudent portfolio diversification and risk management.