SEI reports that a recent poll shows a continued commitment to alternative investments by nonprofit organizations, including educational institutions, hospitals, private foundations, and community foundations. Conducted in December, 2009, the poll looked into the current investment management practices of nonprofit organizations, the challenges these organizations are facing, and how these organizations are prioritizing and addressing these concerns for 2010.
The poll states that only six percent of the nonprofit organizations that responded plan to decrease their overall allocation to alternative assets, such as hedge, private equity, real estate, venture capital, and other privately offered funds.
Despite this statistic, the poll is not all good news for the private funds industry. The poll also shows that a significant percentage of its respondents will be addressing liquidity concerns by aligning portions of their portfolio with spending requirements (49%), developing a formal liquidity policy (36%), shifting assets into short-term fixed income (35%), decreasing liquidity and lock-up tolerance for alternatives (29%), and attempting to negotiate shorter lock-up periods (28%).
While alternative assets have been embraced by nonprofit fiduciaries, such as Common Fund, as having a place in a diversified portfolio, public market decreases in 2008 and scandals have forced many to scrutinize their allocations to alternatives. Whether caused by the so-called “denominator effect” (i.e., the percentage of overall assets allocated to alternatives increased as the value of a public market portfolio decreased) or a need for liquidity, some investors have looked for exits – and found few alternatives.
Within the last year, Harvard and Stanford both sought to sell billion dollar alternative portfolios. Ultimately, Stanford pulled its proposed sale and Harvard closed on certain transactions, but at prices noted as having been at the bottom of the market. To put this point in perspective, Cogent Partners reported back in August in its Secondary Pricing Analysis Interim Update, Summer 2009 that median pricing for private funds was 45.1% of the 2008 year end net asset value.
Between the presumably daunting bid-ask spreads and known long hold times, nonprofit investors have had little choice other than to be committed to their alternative investments. The poll shows that nonprofit organizations are now focused on addressing their liquidity needs, fiduciary roles and responsibilities, and conducting an overall evaluation of the complete investment management process.
Rather than asking whether nonprofits are committed to alternatives, the real question may be, in addition to addressing fiduciary concerns – given the liquidity concerns highlighted by the SEI poll – whether nonprofits would be as committed to alternative assets (or at least their current managers) at all if they had viable secondary market options.
A summary of the SEI report is available at seiresearch@seic.com.