In the latest episode of the Alternative Allocations podcast, I had the opportunity to sit down with Wendy Li, Founder and President of Ivy Invest. Wendy and I explored “The illiquidity premium: lessons learned from institutions.” Wendy spent nearly two decades working with large endowments and foundations before founding her firm.
I began by asking Wendy who influenced her early philosophy. She noted that David Swensen, the former Chief Investment Officer of the Yale Endowment, had a profound impact on many endowments and foundations including The Metropolitan Museum’s investment office where she worked. Swensen and his disciples brought a more professional and sophisticated approach to allocating capital, one that included healthy allocations to alternative investments.
Based on their access and success, many of the endowments and foundations allocated capital in a similar fashion to the Yale Endowment. Through much of Swensen’s tenure, he had a 70%-80% allocation to alternatives, as he espoused the virtues of allocating to the inefficient parts of the markets (i.e., private markets).
While there are lessons to be learned by institutional allocators of capital, there are certainly differences between institutions and individual investors. I asked Wendy about some of the differences. “Institutions often have multi-decade experience of having invested in alternative managers and alternative asset classes. There is a depth of expertise that is accrued over time to these institutions. There's a lot of institutional knowledge.”
She emphasized developing relationships with managers, conducting due diligence, and the importance of the people. Wendy noted that, “It's all about the people. It's the experience and depth of knowledge of those individuals that are the investment managers at that firm. And so, it matters very much, who are the people behind these strategies.”
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Given her experience working with endowments and foundations, I was curious about Wendy’s views regarding the evergreen fund structures coming to the marketplace. She acknowledged that institutions are using this structure but likes how well they work for individual investors. “I think the beauty of these evergreen structures is providing access to private markets investments in a way that feels a lot more familiar. You're buying and selling shares of a fund. So just mechanically, there is a familiarity.”
We discussed the liquidity provisions of these structures. “It is really important for folks to appreciate that while there is a liquidity feature, I really like to describe it as ‘a break glass in case of emergency quarterly.’” We both agreed that to capture the long-term illiquidity premium of private markets, investors should treat them as long-term holdings (7-10 years).
I wanted to know where Wendy sees the most attractive opportunities today. She noted the attractiveness of the secondaries market, distinguishing between limited partners-led which is more mature, and general partners-led where there are opportunities to take advantage of inefficiencies. Wendy noted the current stress in the credit markets may provide the opportunity to take advantage of market dislocations. She specifically noted that distressed managers may be able to find attractive opportunities today.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.
“Secondaries” is the term related to private offerings (typically structured as partnerships, led by investment managers as the General Parter, or GP) where a new investor, or secondary buyer, purchases an existing investor’s commitment to a private equity fund and effectively becomes a replacement investor as a limited partner (LP).
Investment strategies involving Private Markets (including investments in private companies and/or securities) are complex and speculative, entail significant risk, should not be considered a complete investment program, and are suitable only for persons who can afford to lose their entire investment. Such strategies may have limited liquidity in both the investment products and their underlying investments. Underlying investments may never list on a securities exchange and lack available information due to their private nature. These factors may negatively impact such investments’ market value and a manager’s ability to dispose of them at a favorable time or price. Additionally, certain investment fund types mentioned are inherently illiquid and suitable only for investors who can bear the risks associated with the limited liquidity of such funds. Such funds may only provide limited liquidity through quarterly repurchase offers that may be suspended at the discretion of the manager or the fund’s board. There is no guarantee these repurchases will occur as scheduled, or at all. Shareholders may not be able to sell their shares in the Fund at all or at a favorable price.
Diversification does not guarantee a profit or protect against a loss. Past performance does not guarantee future results.
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