Panellists:
Aaron Diefenthaler: I would say that we are definitely looking at avenues beyond public markets. Going back 20 years, the public equity opportunity set has been approximately cut in half and we are seeing private companies stay private longer.
The IPO market is not the end-all-be-all for these types of companies; there are plenty of sources of fresh capital. As a result, long-only investors have to engage private markets to keep the opportunities comprehensive enough.
"We are definitely looking at avenues beyond public markets."
Even within the public universe, we have broadened our benchmark profile to be more all-market encompassing, rather than simply S&P 500 focused. You are getting some concentration risk in those major market cap-weighted indices. You definitely have to broaden the opportunity set, whether it be private market, global, etc. to maintain an appropriate level of granularity.
Rip Reeves: There is not a significant direct impact to our investment strategy from the decrease in the public market access for a few reasons. First, we started funding non-public, illiquid strategies several years ago, from our public market allocations.
Second, on high grade/fixed income public allocations, we generally take a passive investment approach, so turnover is limited in those portfolios - by design.
"We started funding non-public, illiquid strategies several years ago."
Given the buy and hold nature of our high grade/public allocations, reduced supply of new issues doesn’t affect us as dramatically as if we were active investors in this sector. Yes, it does affect us, but not as significantly for these reasons primarily.
Jack Nelson: The decrease in public market offerings has helped support valuations in sectors that have experienced the reduced supply and demand. As a result, the reduced supply of new securities makes holding existing investments easier.
For example, in the case of municipal bonds, the reduced supply provides price support to a sector where we and others have less current demand. The price support provides us with the option to continue holding.
Aaron: I think your question assumes significant allocation shifts into private markets. At the end of the day, we are talking about less than five per cent of most insurance portfolios.
I believe, the private market trade is here to stay for insurance and many have conditioned themselves to engage private markets in some way. I don’t think that abates at all. We are all in it, although some private markets do feel a little crowded.
"The private market trade is here to stay for insurance."
Jack: I believe more companies will opt to stay private longer or not go public. As a result, the equity and debt will need to be raised in the private markets. Consequently, I believe the private market will expand over the next few years.
Rip: The private markets are quite different from our core fixed income portfolio allocations. For those insurance CIOs who have excess liquidity, capital, and an appetite for higher levels of income and forecasted return - the private markets may be suitable additions to the general account.
Liquidity monitoring is imperative; given these investments are a long-term commitment. So do your research.
Aaron: In a tough liquidity environment, the private market assets are not the ones you are going to call on for liquidity needs. Instead, it is the public market assets. But let’s not forget these also have potential liquidity challenges in an environment like Q4 of 2008.
"The reality remains, liquidity is always there when you need it least."
It was the liquidity crunch around the public market assets that created problems, not the private market assets.
A good reminder is to ensure that you have good contingency plans in place to provide liquidity for a big event or something out of the ordinary.
This can include lines of credit or borrowing facilities to make sure that you can navigate through those types of environments where public markets are under pressure and bid/ask spreads move really wide. The reality remains, liquidity is always there when you need it least.
Jack: I have believed for some time that companies in our industry carry more liquidity than they need. If we can find private investment opportunities that compensate us for the lack of liquidity, then we should be making those allocations.
