A study of LPs finds that they have not greatly changed some kinds of investments, although they have definitely cooled on cryptocurrencies amid volatile markets, inflation and rising interest rates.
Limited partners, aka investors, in alternative assets such as
private equity and venture capital are sticking with their
commitment to the sector despite the buffeting of higher interest
rates and other forces, a new report says.
More than half of LPs (56 per cent) are still increasing
alternative investments and a similar percentage indicated that
they would do so in 2022. A higher percentage in 2023 (86 per
cent) plan to do so via fund managers, according to the Dynamo
Frontline Insight Report: Analyzing Trends, Identifying
Challenges, and Harnessing Insights from Leading LPs & Asset
Allocators.
In other details, the 19-page report found that more LPs and
asset allocators are considering secondaries in 2023, jumping
nine points from 2022. (The term refers to buying and selling
pre-existing stakes in private equity, credit, real estate, and
infrastructure.)
The study shows that limited partners have fallen out of love
with cryptocurrencies, stung by their apparently inability to
provide much or any hedge from inflation. Just 3 per cent of LPs
held them in the latest survey, from 13 per cent the previous
year. Derivatives and cryptocurrencies were the two areas where
LPs pulled back when it comes to investing in alternatives.
According to the report, LPs say that economic uncertainty,
automating manual tasks, and employee recruitment/retention are
the top challenges of 2023.
Holding fire
This year’s survey did not indicate notable movement in terms of
where LPs plan to deploy capital.
In this year’s survey, respondents indicated that the US/Canada
continue to lead the pack (71 per cent), followed by Asia
(14 per cent) and Europe (14 per cent). (The bulk of the survey
respondents were located in the US/Canada (65 per cent) and
Europe (18 per cent).)
The study showed that there was an absence of Middle East market
investments as part of the strategy of the LPs surveyed. In 2023,
no LPs or asset allocators reported plans to deploy capital in
the region. In the 2023 GP survey, respondents limited the Middle
East to just 3 per cent. (Editor’s note: that result may perplex
some readers; we
carried this UBS report which discussed digital
technology potential in the Middle East.)
On a more upbeat tack, for the first time the survey asked
limited partners what they thought of artificial intelligence as
an investment area and what specific areas global LPs would like
to see their technology-focused fund managers hold. Generative AI
landed as the top priority, followed by edge computing and native
clouds (e.g., managing cloud networks and plan for future
scaling). Automation and hyper-automation were also of interest
to survey respondents. (“Edge computing” is a distributed
information technology architecture in which client data is
processed at the periphery of the network.)
“As LPs and their GP counterparts strategize around generative
AI, native cloud, and automation-focused investments, they are
also looking to adopt many of these technologies internally. In
addition to the improvement of processes, LPs recognise an
opportunity to improve the recruitment and retention of
high-quality talent,” the report said.
The study surveyed more than 100 global LPs and asset allocators.
Most respondents were located in the US and Canada (65 per cent),
followed by Europe (18 per cent), Asia (11 per cent), and the
remaining were split between Central/South America and
Australia/New Zealand. Most of the participating firms invest in
under 50 funds (52 per cent) with 33 per cent of respondents
investing in more than 100 funds.
Total assets under management ranged from more than $10 billion
(35 per cent) to under $1 billion (35 per cent), with the rest
being between $1 billion to $10 billion (30 per cent). The online
survey was conducted throughout July and August 2023.
In other areas, the report examines business process and workflow
challenges for LPs; investment processes; research management;
portfolio management; and document and data
management.