By David G. Barry
Endowments and foundations are
looking to increase their exposure to illiquid investments – but in ones
providing more upfront yield.
That is one of the key takeaways from a survey of more than 30 endowment and
foundation managers by KKR’s Global Macro & Asset Allocation team,
which is headed by Henry H. McVey, chief investment officer of the
global investment firm’s balance sheet.
Titled, “The Times
They Are A-Changin,’” the report found that the CIOs questioned have increased
their illiquid-type investments to 52% from 48% prior to the onset of COVID in
early 2020. These CIOs are now looking to boost their illiquid number to 55% of
total plan assets within three years.
However, to offset reduced
realizations and the volatility in the equity markets, the CIOs are looking to
invest more in private credit, real estate, infrastructure and select private
equity opportunities.
The CIOs are particularly
focused on growing their real assets portfolio, given that they believe
“inflation will become embedded,” according to KKR’s report. This effort,
points out the study, is “actually somewhat of a conundrum as many
organizations have recently divested from natural resources. This, in turn, is
leading them to try to find “cleaner” opportunities across infrastructure, real
estate and climate change.
The CIOs also are geared
toward finding managers who are going to do what they proposed doing. According
to the study, CIOs “felt somewhat blindsided” by long/short hedge funds that
not only generated weak returns but also had sizable illiquid positions. They
also were not happy with the venture capital firms that held onto their public
positions after the surge in IPOs in 2021.
Russia’s invasion of Ukraine
also has many of those surveyed “bracing for an era of de-globalization,” said
KKR. One result is that many of those in the report are now capping direct
exposure to China at around 10% or less.
A majority of those surveyed
– 70% – acknowledged that environmental, social and governance (ESG) concerns
were impacting their current and future investments. And yet half of those in
the survey admitted they had no plan assets directly committed to ESG funds.
KKR attributes this “disconnect” to the fact that many of these CIOs are
spending more time on where not to invest – oil, coal, etc., – and on
incorporating ESG into all aspects of their overall plan.
The CIOs, according to the
report, are particularly focused on the global energy transition, supply chain
resiliency and workforce development.
The report is available here: https://www.kkr.com/sites/default/files/The-Times-They-Are-A-Changin.pdf.