Xponance’s Tina Byles Williams recently told me while visiting New York that “if you look at where allocation dollars are going versus where alpha is, they're not in the same place.” This is why investors like the 30-year-old Xponance focus on the mid-market GPs.
Rather than treat PE like a “big casino table” where brand names guarantee big wins, Byles Williams suggested that allocators should recognize that these managers are crowded with capital and chasing the same deals. The recent results of II’s global asset manager survey seem to confirm this gambler’s mindset: Investors recently confirmed their commitment to PE despite its disappointing returns.
Okay, there is some method to the madness. TIFF Investment Management’s Kane Brenan recently responded to my question asking why PE is still so appealing (I actually received a slew of answers from y’all, so thanks for that). While he admitted that “this is the worst period we’ve seen in terms of performance,” Brenan argued that “historically, private equity after underperformance tends to snap back.”
Brenan sees three drivers for this. One, PE still has structural advantages. Two, hypergrowth is shifting to private markets — valuations used to soar when firms like Apple or Microsoft went public; now, private firms see 10x growth without an IPO. And three: Good managers have shown consistent outperformance.
Still, Brenan concedes: “We won’t know for 10 years if we’re right.”
Byles Williams noted the investment industry is one “that is slow to recognize trends,” and one that “prefers comfort and scale over focus and performance.”
This theme of institutions moving slowly to fast moving trends is certainly evident across many aspects of the financial and political landscape: We’re seeing DC plan sponsors slow to add private assets to 401(k) plans; world leaders slow to acknowledge a new world order; and investors slow to enter what Byles Williams describes as “the unloved and less capitalized spaces within private markets.”
Ultimately, it’s not just about where to deploy capital, but it’s about whether the industry’s preference for safety and familiarity will end up undermining the very returns it’s chasing. As the gap between where the money flows and where alpha lives, investors need to choose whether to play it safe or venture out of the big names to go where the returns actually are. Brenan will see you in 10 years.
A couple weeks ago, Institutional Investor Editor Julie Segal headed over to Scottsdale to attend II’s Endowment and Foundation Roundtable. She had some thoughts and asked for some space in this week’s column to share them. Take it away, Julie!
Julie Segal's Thoughts From Scottsdale: In the week I've been back from the E&F conference, I've been thinking about what ties together the issues that bubbled up in conversations on stage and off.
“If you don’t know where the world is headed, don’t position your portfolio like you do.”
I heard some version of this quote more than once. People nodded. A few laughed. It felt like common sense in a world where trade policy shifts overnight and the dollar’s reserve status is no longer treated as untouchable.
But the quote also exposed a tension underneath the conventional practices that conference attendees have used to understand their investments.
If you truly don’t know where the world is headed, then “do asset classes even matter anymore?” as one moderator said. Is the total portfolio approach just a new label for what good investors have always done, or is it something different and more urgently needed to understand complexity in a world where everything seems to be moving together?
TPA, stripped of jargon, is about knowing what’s actually in your portfolio. As one panelist put it, you need to “police whether different teams are loading up on the same risk.”
That idea turned into a discussion of how concentration risk is everywhere (as James noted above). It’s in continuation funds holding one or two deals. It’s in the S&P 500. It’s in the Magnificent Seven. It’s even in the data managers rely on to find quant signals and traditional opportunities.
But concentration is also how you make money. It means putting more capital behind your best ideas. The cost, as one allocator said, is “risk and noise.” The job is to calculate the pain if it goes wrong — ideally before it goes wrong.
And then there was another comment that I scribbled down:
Life is good right now. So you’d better start prepping your investment committee for what could be coming.
But few CIOs argued it was time to pull back from growth. As attendees said, universities are fighting for their lives. Some endowments fund 50 or 60 percent of operating budgets. A 30 percent drawdown isn’t abstract. It’s layoffs. It’s financial aid cuts. Over lunch, people swapped memories of frozen assets in ’08–’09 and board meetings no one wants to relive.
Still, as one attendee put it, “We have to get inflation plus five to stay relevant. And we want more than that.”
That’s the contradiction. You don’t know where the world is headed. But you can’t sit on the sidelines.
A number of people also stopped me to talk about my correlations story from last week. Multistrats, credit, event-driven — strategies that look nothing like equities on paper — have been moving almost in lockstep with stocks. Why is equity risk showing up in places it supposedly shouldn’t? No one offered a clean answer. All you can do is understand what you own, stress it in different environments, and be honest about the risks you’re doubling up on.
Not investing as if you know where the world is headed sounds prudent. In practice, no one is opting out. Maybe it’s time to be contrarian and think about capital preservation.
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…Thanks, Julie!
That’s it for this week’s edition. You know the drill: drop me a line and fill me in on what’s going on with you (I live for it). Until the next time, have a great holiday weekend!
