Singapore’s GIC creates private asset investing framework with PGIM

first_imgGIC, Singapore’s sovereign wealth fund (SWF), along with PGIM, the global investment management arm of Prudential Financial, have created a framework that links top-down asset allocation with bottom-up private asset investing.The platform is aimed at supporting investors that are increasingly faced with the difficult choice between potentially higher portfolio returns and greater liquidity, under the strains of the current market volatility.In a joint paper, the duo said investors seeking higher returns and better portfolio diversification have been increasing their allocations to private assets.However, GIC and PGIM said that as this allocation increases, the liquidity characteristics of investors’ portfolios change, and this shift comes at “the cost of decreasing portfolio liquidity”.  In the short term, some asset owners may be unable to meet immediate portfolio liquidity demands, they added.“By measuring the potential tradeoff between asset allocations, total portfolio performance and the frequency of certain liquidity events with different severities, this framework can help investors quantify the interaction between their portfolio structure and performance, and formalise their decision-making around portfolio liquidity choices,” the paper stated.For asset allocators, liquidity risk is one of the most critical, but least quantified risk dimensions in portfolio construction, it added.Unlike fluctuations in returns, which tend to have a transitory impact, liquidity can be a matter of survival.“Even investors without explicit obligations (eg, some SWFs) may have critical liquidity needs – such as rebalancing the portfolio to manage risk, or having enough dry powder to provide support during periods of market dislocation.”Many institutional investors often model cashflow with illiquid private assets on a deal-by-deal basis, or at the aggregated strategy/vintage level, the paper continued, while portfolio construction is conducted by the team responsible for top-down asset allocation.“The limitation of such an arrangement is that portfolio asset allocation decisions often do not consider bottom-up cash flow information and, likewise, the deal teams usually do not formulate their commitment strategies in a total portfolio context.”Managing illiquiditySorca Kelly-Scholte, managing director and head of EMEA pensions solutions & advisory at JP Morgan Asset Management, said the GIC/PGIM report sets out a useful framework to help investors assess and manage private market illiquidity.“The analysis appears to focus on private equity, in particular using PME (public market equivalent) measures and focussing on drawdown of commitments and return of capital to investors,” she said.“It could usefully be extended to real assets, and in particular to income-oriented and open-ended structures – where the bulk of the return derives from income that forms a stable source of ongoing cashflow and liquidity to investors,” she continued, adding that this could be a particularly useful source of stability during periods of market crisis.“Private equity is less likely to return cash and potentially more likely to call on commitments, and liquid assets can see rapid falls in value, presenting a risk of forced fire-sales,” she said.Padraig Brown, Mercer’s head of real estate – Pacific, told IPE that COVID-19 showed diversification of assets to be essential.Some investments that outperformed in the global financial crisis (eg, shopping centres) have borne the brunt of government-enforced social distancing measures in the current crisis, he said.Brown noted that most real assets have strong cash generation characteristics. “Cash is gold in a liquidity crisis, and retaining distributions from real assets allows portfolios to meet commitment calls, cure breaches of banking covenants and take advantage of distressed pricing.”last_img

Leave a Reply

Your email address will not be published. Required fields are marked *