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.