Loading...
HomeMy WebLinkAboutReports - 2019.09.19 - 32238Alternative Investment Strategies for Oakland County Employees Retirement System September 19, 2019 2 Important Disclosure Information This presentation is intended solely for the named recipient. It is the proprietary confidential work product of AndCo Consulting and is not intended to be reproduced or distributed to the public. Any information contained in this report is for educational and informational purposes only and should not be construed as a recommendation regarding any particular course of action. Past performance does not guarantee future results. Information is based on sources and data believed to be reliable, but AndCo cannot guarantee the accuracy, adequacy or completeness. The source for all data, charts and graphs is AndCo Consulting unless otherwise stated. The information provided is valid as of the date of distribution or the as-of date indicated and not as of any future date and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after such date. AndCo Consulting is an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. 3 Introduction The Investment Challenge The expected returns from traditional assets classes has declined due to lower interest rates (impacts fixed income) and higher valuations (impacts equities). Alternative asset classes offer the opportunity to generate higher returns. However, these strategies exposure investors to additional risk factors. Alternatives may also offer diversification benefits to an overall portfolio. Potential Investment Options The Investment Sub Committee recently reviewed several alternative asset classes. Based on the expected risk and return characteristics of the strategies, the Sub Committee selected Opportunistic Credit and Private Equity as potential new strategies for the Plans. Opportunistic Credit 5 Introduction to Opportunistic Credit Opportunistic Credit offers investors exposure to a broad range of investment opportunities, including bonds, loans, convertibles, real estate debt, emerging market debt, collateralized securities (CLOs, CMOs…) and/or other fixed income related securities. These strategies assume additional risks in the pursuit of potentially higher returns. Credit Risk: The risk of loss resulting from the borrower’s failure to repay the loan’s interest and/or principal. Interest Rate Risk: The risk of loss resulting from a change in interest rates. Liquidity Risk: The risk of loss resulting from the lack of a market in the security. Market Risk: The risk of loss resulting from a decline in the overall market. Opportunistic Credit managers attempt to reduce risk concentrations through diversification –investing across asset classes, industries, companies, geographic regions, and other risk factors. 6 Introduction to Opportunistic Credit Opportunistic Credit managers attempt to utilize their investment experience to generate strong risk-adjusted returns. The managers tend to exploit market inefficiencies to generate their returns. Credit Strategies: Managers purchase fixed income securities of companies selling at an attractive price to the market. Based on the manager’s credit research, the company is expected to repay their obligations (interest and principal). Stressed Strategies: Managers purchase fixed income securities of companies selling at a meaningful discount to the market due to industry/company related issues. Based on the manager’s credit research, the company is expected to repay their obligations (interest and principal). Liquidity Strategies: Managers offer liquidity to fixed income market participants at times of stress, purchasing securities at a discount and holding them until the market returns to more “normal” conditions. 7 Introduction to Opportunistic Credit Opportunistic Credit generally focuses on performing and stressed securities, depending on the strategy and expertise of the portfolio management team. Portfolio Structure: One or more managers, based on strategies. Investment Horizon: Strategies focused on performing and stressed securities will generally have a shorter “harvest” period than distressed focused strategies. Vehicle Structure/Term: Strategies focused on more liquid securities may be offered in a commingled fund structure with limited liquidity (i.e. 25% access each quarter). Strategies focused on more illiquid securities may be offered in a limited partnership structure with no liquidity (i.e. proceeds from security sales are distributed to the limited partners). Fees: Typically asset-based fees are assessed; some strategies may also charge a performance-based fee. Private Equity 9 Introduction to Private Equity Private Equity is broadly defined as investments in private companies that are privately negotiated transactions and typically result in private ownership of businesses. Private Equity managers are typically independent organizations that often take an active role in the management of a company in order to create value, enhance returns, and exit successfully. Private Equity investing spans a spectrum of investment stages and strategies, which are generally defined as venture capital, growth equity, buyouts, and distressed/turnaround. Managers may invest in publicly traded companies with the intent to take them private. Most investors access Private Equity by investing in illiquid, long-term, closed-end partnerships (PE funds). Investors in PE funds are limited partners (LPs) investing alongside the general partners (GP/manager). Interest Rate Risk: Major Risk Factors: manager risk, concentration risk, market risk, illiquidity risk, vintage year risk, and other strategy specific risk factors. Investors attempt to reduce risk concentrations through diversification. 10 Introduction to Private Equity Private equity is categorized by the stage of a company in its life cycle. Generally, the earlier an investment is made in a company, the higher potential risk and return. Venture Capital: investments are made in the early life of the company (seed stage, early stage, and pre-revenue). Typically companies have an innovative business idea for a proprietary product or service. Growth Equity: provides expansion capital for small, growing businesses, that are generating cash flow and profits. Buyouts: investments in established, performing companies that may require capital to expand and or restructure. Companies are often publicly held but transactions takes ownership private. Turnaround/Distressed: investments in companies that have poorly organized capital structures or failing operations. 11 Introduction to Private Equity Properly structured Private Equity allocations require multiple levels diversification, including investment style, vintage year, and managers. Manager selection is vital, as the dispersion between managers within and across styles may vary greatly. Portfolio Structure: Multiple managers across strategies and vintage years. Alternatively, fund of funds or secondary funds may be used to simplify the manager selection process. Investment Horizon: Private Equity strategies tend to be very long-term due to the nature of the underlying investments. Vehicle Structure/Term: Strategies are generally offered in a limited partnership structure with no liquidity (i.e. proceeds from investment sales are distributed to the limited partners). Partnerships may have terms of 10 years or longer. Fees: Partnerships assess asset-based fees and performance-based fees.