Market decline

Early funds may fall victim to market decline

As market losses mount, there’s bad news for early fundraisers: Some dispatchers say they won’t put new funds to work in inaugural funds.

The cooling comes after years of allocations being more open than ever to emerging managers, alternative metrics for judging the potential of new companies and new investment ideas, particularly in private markets. But the tide is turning for asset owners who say that while they’re not fully vetted, they want to stay away.

“We’re definitely focused on renewal strategies,” said Adam Cloud, treasurer for the city of Hartford, Connecticut, at the Context 365 conference in New York on Tuesday. “We put the brakes on new concepts. We need to put a lot more money aside.

Cloud spoke on a panel alongside Ahmad Ali, chief executive of the Presbyterian Church Pension Plan, Michael Oliver Weinberg of CMT Portfolio Advisors and moderator Steve Novakovic of the CAIA Association.

The conference coincided with the S&P 500 and NASDAQ falling into bear markets on Monday. Panelists – mostly benefit recipients discussing what to expect in the second half of 2022 – expressed concern over market developments, inflation, rising interest rates and high market valuations private.

“I am deeply worried about inflation,” Cloud said. He added, there may be an upside. “For the first time in seven years, however, we could draw income from our fixed income portfolio.”

Cloud noted that while the Hartford Municipal Employees Retirement Fund is willing to look to “strong and established” investment managers, first-time funds are “definitely not” something they’re considering in this moment.

Ali had similar thoughts. While the Presbyterian Church’s pension scheme is ready to consider spin-outs, other funds may not be considered now. “Somebody we don’t know, that’s not something we’ll do now,” Ali said.

He added that the rate at which the pension plan put capital to work has slowed. “We’ve told many GPs that if you’re not in our budget for 2022, we’ll talk to you in 2023,” Ali said.

The cautious attitude does not only apply to the first fundraising of managers. Weinberg noted that many private equity managers who raised their first fund only a year or two ago are already back in the market raising a second vehicle.

“It’s not attractive to us,” Weinberg said. Cloud agreed. “There may be people who embezzled large funds, hung up a shingle and said, ‘I’m a private credit guy now,'” he said. “But we have to see what happens to them when the tide goes out.”

Despite their reluctance to invest right now, dispatchers see opportunities for investors who have capital to deploy.

According to Weinberg, macro hedge funds, managed futures funds, long-short biotech strategies, distressed investments, relative value funds and healthcare royalties are all attractive investments. “If you have capital today, there is so much to do,” he says.

Another area he would consider is secondary funds. “Everyone has the denominator effect,” Weinberg said. “Everyone is overworked.” In other words, asset holders whose investments in public equities have lost value are now over-allocated to private investments. At times like these, they may need to sell.

“You’re going to have people who are forced to do things now that they wouldn’t do otherwise,” Ali said.