Key Takeaways
- • KKR's Global Macro & Asset Allocation team, led by Henry H. McVey, surveyed more than 30 endowment and foundation CIOs and found they have raised illiquid investments to 52% of portfolios from 48% before the onset of COVID-19 in early 2020.
- • Endowment and foundation CIOs target 55% of total plan assets in illiquid investments within three years, shifting toward private credit, real estate, infrastructure and select private equity to offset reduced realizations and equity volatility.
- • CIOs are prioritizing real assets because they expect "inflation will become embedded," with a focus on "cleaner" infrastructure, real estate and climate opportunities.
- • Respondents said they were "somewhat blindsided" by long/short hedge funds that delivered weak returns alongside sizable illiquid positions, and were dissatisfied with venture capital firms that held public positions after the 2021 IPO surge.
- • Many respondents are capping direct China exposure at around 10% or less, and 70% say ESG concerns are affecting their investments, though half have no plan assets directly committed to ESG funds.
Summary
Endowments and foundations appear poised to increase their allocations to illiquid assets, favoring strategies that provide more upfront yield, according to a survey published by KKR and reported by David G. Barry. The survey, titled "The Times They Are A-Changin'," polled more than 30 endowment and foundation managers and was conducted by KKR's Global Macro & Asset Allocation team, headed by Henry H. McVey, chief investment officer of the firm's balance sheet.
The report found that respondents had raised their illiquid holdings to 52% of assets from 48% prior to the onset of COVID-19 in early 2020, and now intend to lift that figure to 55% of total plan assets within three years. To offset reduced realizations and equity market volatility, CIOs plan to expand exposure to private credit, real estate, infrastructure and select private equity opportunities.
Real assets are a particular focus. KKR reports that CIOs believe "inflation will become embedded," a position the study describes as somewhat of a conundrum, since many organizations have recently divested from natural resources. Instead, they are seeking "cleaner" opportunities across infrastructure, real estate and climate change.
Manager selection concerns also emerged. According to the study, CIOs felt somewhat blindsided by long/short hedge funds that produced weak returns while holding sizable illiquid positions, and were dissatisfied with venture capital firms that retained public positions following the surge in IPOs in 2021. Russia's invasion of Ukraine has left many respondents bracing for an era of de-globalization, with many capping direct China exposure at around 10% or less.
On ESG, 70% of respondents said environmental, social and governance concerns affect their current and future investments, yet half reported no plan assets directly committed to ESG funds. KKR attributes this disconnect to CIOs spending more time on where not to invest, such as oil and coal, and on integrating ESG across their overall plans. The CIOs are particularly focused on the global energy transition, supply chain resiliency and workforce development.
The report found that respondents had raised their illiquid holdings to 52% of assets from 48% prior to the onset of COVID-19 in early 2020, and now intend to lift that figure to 55% of total plan assets within three years. To offset reduced realizations and equity market volatility, CIOs plan to expand exposure to private credit, real estate, infrastructure and select private equity opportunities.
Real assets are a particular focus. KKR reports that CIOs believe "inflation will become embedded," a position the study describes as somewhat of a conundrum, since many organizations have recently divested from natural resources. Instead, they are seeking "cleaner" opportunities across infrastructure, real estate and climate change.
Manager selection concerns also emerged. According to the study, CIOs felt somewhat blindsided by long/short hedge funds that produced weak returns while holding sizable illiquid positions, and were dissatisfied with venture capital firms that retained public positions following the surge in IPOs in 2021. Russia's invasion of Ukraine has left many respondents bracing for an era of de-globalization, with many capping direct China exposure at around 10% or less.
On ESG, 70% of respondents said environmental, social and governance concerns affect their current and future investments, yet half reported no plan assets directly committed to ESG funds. KKR attributes this disconnect to CIOs spending more time on where not to invest, such as oil and coal, and on integrating ESG across their overall plans. The CIOs are particularly focused on the global energy transition, supply chain resiliency and workforce development.
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