More institutional investors are investing in emerging alternatives managers, showing that interest in smaller firms has not dampened during the pandemic.
At least 50% of allocators are invested in alternative firms that were founded less than two years ago, according to a survey released last week from law firm Seward & Kissel. Overall, eight out of 10 allocators are investing in alternative managers.
The “Alternative Investment Allocator Survey” covered pension funds, endowments, family offices, seeders, high-net-worth individuals, and others.
Their interest alleviates concerns that the pandemic might have weeded out smaller managers that lack the reputation or the resources of bigger asset managers to pull through at a time when managers cannot meet with allocators in person, according to Steve Nadel, partner at the Seward & Kissel Investment Management Group.
Emerging managers have been using teleconference meetings on platforms such as Zoom, as well as referrals, to their advantage in meeting allocators, who are now more comfortable conducting due diligence online, Nadel said.
About half of survey respondents are expecting their average allocation size to be more than $25 million, the law firm found. Interest in newer firms is particularly strong among fund of funds, all of which said they are open to investing with emerging managers this year. By comparison, just half of pension funds said they are interested in new firms.
“As managers get larger and larger and larger, it gets a bit more challenging to generate alpha,” Nadel said. “And sometimes the smaller, more nimble managers are able to generate better alpha because they don’t have as much assets to deploy.”
Investor interest in alternative funds is also growing, as investors seeking better returns and less volatility from the market are diversifying into illiquid strategies. An average 42% of investors are planning to boost funds in alternative strategies this year, the survey found, especially in private equity, private credit, and venture capital strategies.
About 40% of investors are also considering allocations to cryptocurrency or futures strategies. Nadel expects the number of investors interested in those assets could grow next year. Another 60% of investors are looking at quantitative, macro, or infrastructure strategies, the survey found.
About 86% of respondents in the survey are using direct fund investments, 30% like separately managed accounts, and 28% favor co-investments.
Of the investors surveyed by the law firm, nearly one-third came from funds of funds (29.4%), 15.7% reporting were from wealthy individuals and family offices, 13.7% worked at endowments, foundations and charities, and 7.8% were part of corporate or government pension systems. The others were investment consultants, seeders, outsourced CIOs, or other institutional investors.