Eaton: Denominator Effect Overblown

A new report from Eaton Partners indicates that most institutional investors are remaining with their private market allocations despite increased stress from the COVID-19 pandemic.

According to a recent survey, half (51%) of the limited partners surveyed say they are making no changes to their portfolios at this time, while 23% are increasing allocations and 26% are cutting allocations. This sentiment has weakened slightly when compared with the 64% of limited partners who said they were planning to stay the course when questioned last month.

Findings from the latest Eaton Partners LP Pulse Survey also suggest that some of the biggest fears surrounding the private capital markets appear overblown. Most respondents (55%) are not concerned about the denominator effect – when an investor’s private equity allocation grows as a percentage of its portfolio because of declining values in the public markets.

Roughly half (51%) have not seen a noticeable change in capital calls and a majority (56%) say limited partners are not facing liquidity issues.

Survey respondents also anticipate a shift in the way investors evaluate future opportunities, with 20% saying their new normal will be heavily reliant on video conferences over in-person meetings with general partners.

Another 53% expect to have a mix of virtual and physical meetings while only 27% expect things to go back to the way they were before the COVID-19 pandemic.

Other key findings from the Eaton report include:

  • Over the next two months, 20% of respondents say they are “triaging” their current portfolio versus 36% who are focusing on the long-term impact of their investment strategy. 44% are equally focused on both.
  • Private equity continues to be the most appealing alternative asset class right now (45%), up from 39% in the April survey. Private credit trailed at 27% and hedge funds at 17%.
  • Roughly half (52%) of respondents are focused on infrastructure as a strong asset class for investments this year with data/tech and ESG/renewables strategies in greatest demand.
  • Almost two-thirds of respondents (62%) believe there will be an elevated interest in asset-backed strategies this year.
  • In terms of COVID-19’s impact on due diligence procedures, 43% say there has been no significant impact, compared to 28% of investors who say they are reevaluating the areas that need to have a larger emphasis in the process. 16% have increased emphasis on disaster preparedness.

“As investors grapple with volatile markets and ongoing uncertainty about the true impact of COVID-19, they will benefit from strategies that offer strong uncorrelated returns to the public equity markets,” said Jeff Eaton, a partner at Eaton. “At Eaton Partners, we are seeing an increased appetite for actionable opportunities among investors looking to take advantage of perceived market dislocations. Interest in infrastructure continues to grow, particularly in data and IT as well as ESG-focused sectors like renewables, power, and water. We also expect to see more opportunities in healthcare and other mission-critical sectors like technology, mobility, and e-commerce.”

Rowayton, Connecticut-headquartered Eaton Partners has helped investment managers raise more than $100 billion across more than 125 alternative investment funds and offerings since its founding in 1983. The firm is a subsidiary of Stifel Financial (NYSE: SF) and has offices throughout North America, Europe and Asia.

The online survey of 71 institutional investors was conducted from May 13, 2020 through May 19, 2020.

Click HERE for a PDF of the full survey results.

Private Equity Professional | May 29, 2020

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