In tempestuous times in public markets, private market funds have a more vital role to play than ever in reducing overall portfolio volatility says Lorna Robertson, Head of Funds at alternative investment firm, Connection Capital.
In tempestuous times in public markets, private market funds have a more vital role to play than ever in reducing overall portfolio volatility. We aim to offer clients access to a broad range of fund strategies, so they have the flexibility to adjust both strategic and tactical allocation and to take advantage of, or mitigate the effects of, market conditions. As a result, they can effectively create their own bespoke fund-of-funds.
Our fund offering continues to grow and we now have £164m of capital committed to 33 funds across a diverse range of strategies including, private equity, venture, private debt, commercial real estate and clean energy infrastructure. In the first half of the year, we continued to put clients’ money to work in a Seed and Series A deeptech fund from IQ Capital and took the opportunity to top up our initial allocation in the final close of Invesco Credit Partners’ distressed debt and special situations credit fund. We also invested with three new managers: Opera (a fund of funds backing emerging European managers in the small cap PE space); Intermediate Capital Group’s flagship PE secondaries fund; and UK-based niche fund manager Rubicon, which focuses on complex industrial businesses.
The overall fund portfolio is performing strongly, with post-Covid recovery evident, especially in the funds directly impacted in the short term. Distributions from the funds have continued and in this year alone, participating clients have received almost £10m in distributions. We are adding to the number of top-quality managers we work with, to broaden the scope and quality of our offering even further. In the current climate, we believe the key is to adapt and diversify. For us, that means choosing fund strategies that are either defensive in their sector focus (for example healthcare); thematic in focus to pick up on global megatrends (such as agri food tech); a natural inflation hedge (such as real estate and other tangible assets); or that have low or no correlation to public markets (e.g. litigation funding).
It also means snapping up good opportunities when we spot them, such as providing much-needed capital for businesses in the private debt space or supporting companies under stress via distressed or special situations funds, or specialist private equity strategies focused on growth or turnaround equity. Doing so has the potential to deliver vintage returns, but we will focus on managers who have experience across market cycles, where the ultimate fund performance will be enhanced by the macro backdrop but is not dependent on it.
Several live fund opportunities are going through the due diligence process spanning the venture capital fund-of-funds, VC secondaries, as well as in a value-add commercial property strategy. In terms of the pipeline for the rest of the year, in private equity we are considering managers in the pan-European mid-market buyout and in the growth equity arenas.
In venture capital our focus will be on later stage/growth stage VC for now, in sectors like agri-foodtech, medtech and fintech. Direct lending funds and potentially venture debt are interesting parts of the private credit market. And private equity secondaries opportunities and distressed and special situations funds are growth areas that are in demand from businesses and investors that we will continue to look at closely. We remain cautious about hedge funds and continue to monitor their performance in this time of stagflation.
Against this backdrop, it is important that we stick to our core values: seeking out opportunities with an attractive risk/return profile, capturing market trends to buoy performance but not relying on them, and backing specialists in niche and complex areas. That’s the way to thrive.