IPEM Paris 2023 - LP-Only Sessions

Private markets investors have a growing list of questions to address as they consider how best to build their portfolio exposure over the coming years. The world has changed on its axis since central banks began hiking interest rates in 2022.

How this might impact performance is yet to be fully understood. Might GPs need to change the performance formula, and update their private equity playbooks in this new market cycle? One thing is certain: the more clarity and guidance LPs have on how to think about performance in the current climate, the better equipped they will be at allocating capital in 2024 and beyond.

A dedicated day of performance insights

Limited partners will have a unique opportunity to debate the future performance of private equity at a bespoke invite-only event entitled LP-Only Sessions at IPEM Paris 2023 on 18th September, prior to the main conference that will run on 19th and 20th September. LPs will benefit from congregating with their fellow peers at the Maison de l’Amerique Latine on Boulevard Saint-Germain; an intimate setting conducive to focused, in-depth discussion, before the hullabaloo of the main 2-day conference.

“We believe LPs need to have dedicated time and space to discuss private market developments. We will be welcoming a deep diversity of investors, from many different geographies to Paris as we seek to internationalize IPEM,” says Antoine Colson, CEO and Managing Partner, IPEM.

Christopher Schelling has been instrumental in designing the LP-Only Sessions agenda. A contributing columnist for Institutional Investor, Schelling has spent more than 20 years allocating to alternative asset managers and in July 2023, became Director of Private Investments at Caprock, an USD8 billion multi-family office.

Reflecting the wider conference theme, “Destined to Outperform”, each of the six LP discussions will focus on performance, with the opening plenary topic entitled, “Measuring Outperformance in Private Markets Portfolio: Theory and Best Practices”.

Private markets have overperformed in the last decade, but will it still be the case for those fund vintages being launched in 2023? And if so, where and how? What does good practice look like, in terms of performance measurement and assessments? “It’s the hardest asset class to benchmark,” comments Schelling. “A benchmark should be a cost of capital equivalent so that you can compare what you did versus what you could have done. That just doesn’t exist in private markets.”

2023: A good vintage?

There is plenty for limited partners to think about today in relation to their private market portfolios: What vintage might 2023 be? Are we entering a recession or will we get a soft landing? Is there too much capital in the market, when you look at late-stage VC, which overheated in 2021/2022? Given that most private market assets were marked down somewhat significantly during the back half of 2022, this is a period of rationalization for LPs. “It is harder for GPs to raise capital than it was two years ago and so the question for LPs is, ‘Should I continue my pace of investment in this market or pull back?’ Historically, after a period of correction, private markets tend to outperform.

But there remains a great deal of uncertainty. Leverage has been a significant driver of PE returns but interest rates are now higher,” says Schelling. In his view, the power dynamic has shifted back to LPs. They are, he says, being more selective with their capital commitments and they are telling GPs to slow down a little bit, in terms of fundraising. As a result, deal flow is likely to slow.

What impact could this have on returns? This will be the focus of the last plenary session of the day, “Mapping Private Markets Risks and Returns for the Next Vintage”. Some LPs are being bolder and stronger in regards to their private market allocations, while others are being more conservative.

This was evidenced when, in February 2023, Marcus Frampton, CIO of Alaska Permanent Fund, announced they would be only allocating around $1 billion to private equity. Conversely, Nicole Musicco, the CIO at CalPERS, plans to add to private equity and venture capital, with CalPERS looking to avoid missing out on any future VC bull markets. “Everyone is questioning their own approach – will what worked well in the last cycle still work well in the future? LPs are appraising their situation on how to build conviction,” notes Colson.

Leapfrogging the endowment approach to performance

Other performance-related sessions throughout the day will look at: the endowment approach in the search for performance; performance and ESG: the missing part; selecting and accessing the best managers, and private markets in liability-driven investment portfolios.

The endowment approach dominates how institutions access private markets, but does it still have relevance today? David Swensen’s Yale model did two things: it built an approach to building portfolios, and then an output to that approach. That output is the result of a bottom-up approach, seeking out the best managers, across all alternative assets, who can generate superior risk-adjusted returns.

Later entrants to private markets tended to focus on the output element and sought to replicate it. Does that approach need to be amended? And how does it compare to smaller investors, such as family offices, who do not have any limits on how much exposure they build to different asset classes? Indeed, in some respects, the family office approach to private markets has almost leapfrogged the Yale model.

“They don’t have asset allocation targets to fill from the top down, meaning they can be more nimble in how they’re building out their private markets exposure,” comments Schelling. That being said, with the dispersion of returns an order of magnitude higher between the best and worst performing managers in privates compared to publics, manager selection is absolutely vital: hence it being the focus of one of the case study sessions.

Green conviction

With respect to how allocators think about the relationship between ESG and performance, there are still many questions that remain unanswered. In private assets particularly, their inherent long-term investment horizon means that accessing hard quantifiable data on ESG metrics, as a function of a fund’s IRR, is still somewhat limited. That is not to say, however, that investing in sustainable assets will not create value, as the world can no longer ignore climate risk; this will lead to substantial private capital investment in energy transition, sustainable housing, and food production in the coming decades.

The ESG panel will look to determine what level of conviction investors are building and as Schelling suggests: “Implementation really matters. It is not just doing it, but it’s how you do it. I think in the long run, my intuition is that it has to at least reduce risk and lead to better risk-adjusted returns.” Goldman Sachs and Mercer are lead sponsors for the LP-Only Sessions, with CAIA, the Institute of Private Capital also involved. Aon, FTI Consulting, Raymond James, and Gide Loyrette Nouel will be sponsoring the LP/GP Reception.

“Performance can lead to many different discussions within private markets. We want to provide a dedicated forum for this, as the industry looks for direction,” concludes Colson.