CIO’s 2019 Consultant of the Year award goes to Nolan Bean, head of institutional investments at FEG Investment Advisors. Bean has demonstrated exemplary talent and poise in starting private markets strategies from scratch for his clients, especially in mitigating and shortening the “J-curve” effect, a phenomena that occurs when private market funds deploy capital in their early years and investors don’t see short-term returns.

Bean spoke with CIO about the approaches that have helped him and his clients eliminate large portions of the J curve, and how his team effectively and lucratively navigates through private markets strategies.

“When it comes to mitigating a J curve, having a mix of asset classes helps—such as having some credit-related strategies in your portfolio; those tend to kick off some income quicker and have a short J curve. That would be point No. 1,” Bean said.

“Point No. 2 is trying to mix in some secondaries, which is a market that has evolved a fair amount. In the early days, it was more of just passively buying out interest of legacy funds, you can tend to do that at a discount. As more money is put in that market, getting a discount to the NAV is impactful. We’re seeing a much larger market open up for end-of-life fund restructurings,” he said. “Whereas when funds get towards the end of their life, secondary managers coming in and restructuring the deals have generated some interesting returns. And there are managers there that do that both within private equity as well as in private real estate.

“And then lastly, sometimes it’s better to be lucky than good, and there were a handful of managers we knew who could raise some capital and deploy some capital, and we were able to come in at the end of a fund cycle where there’s effectively embedded gains,” Bean said. “A mix of good planning, thoughtful diversification, and lots of luck can be helpful. One of the things with luck is having good relationships, so when those things pop up, we have the access and the ability to hop on them.”

Building relationships is undoubtedly a crucial element to navigating through private markets territories with ease and profitability. Bean emphasized the importance of making these relationships mutually beneficial.

“A lot of managers have more demand for their funds than dollars they’re going to raise. So building those relationships, and operating in a thoughtful way, and being a good partner as an LP and a consultant/advisor absolutely helps in getting access to those managers that you would want to invest in,” he said.

“Doing your work so you know them and you know what they’re doing so you’re willing to invest has to be the primary decision point. If you’re at a stage when you’re ramping up exposure, then you start thinking about things like ‘what’s the cash flow time for this strategy?’”

“On one extreme, you have secondary funds, lending strategies that are tracking up income and have shorter J curves. On the other extreme, you have venture capital that has a longer lifecycle. So being sure you’re not leaning too far one way or the other on the strategy mix. And then thirdly, if they’ve deployed some capital, and they check the first few boxes of being a good long-term partner that you would want to invest with, and have effective strategies that you’re looking to mix into your portfolio, I think that’s just the icing on the cake.”

—Steffan Navedo-Perez