Covid changes the rules of the investment game

Despite the exceptional challenges brought by covid-19, investors are only moderately concerned about other limited partners potentially defaulting in funds they have committed to – these concerns average 2.26 on a scale of 1 to 5, with 1 being not very concerned and 5 being very concerned, according to PERE’s Investor Perspectives 2021 Study.

For more insights from the Investor Perspectives 2021 Study, click here. For more on how we compiled the study, click here.

The pandemic has, however, radically changed the way investors do business, with virtual communications becoming widespread, including for new relationships.

The study found 92 percent of respondents would take a first meeting with a manager virtually, although when it comes to other tasks, such as due diligence, fewer investors – 67 percent – are open to conducting it entirely virtually. As time goes on and the pandemic continues, an increasing number of investors are becoming more open to the idea of committing to a new manager’s fund without ever meeting face-to-face – something backed by 52 percent of those polled for the study.

In light of covid, almost 60 percent of respondents have greater appetite for distressed debt or special situations investments. “That absolutely makes a lot of sense, we do see the appetite for it,” says Kiran Patel, deputy chief executive and global CIO at Savills Investment Management. Amid covid-driven turmoil, banks are being more cautious, he explains, which leaves room for other players to fill the gap.

“It’s not surprising debt investment is increasing. The difference in returns between debt and equity is now quite narrow. Also, debt investing, by nature, is seen as less risky, as it is at the bottom of the capital stack,” he adds.

Shifting sector appetite

The disruption caused by the pandemic is also impacting investors’ sector strategies. The most favored are healthcare and industrial, with 38 percent of investors saying they will invest more capital in both segments. The multifamily or residential sector is another beneficiary, with 28 percent of respondents wanting to boost exposure.

“Covid has sped up some of the trends that were already in place, such as growth in e-commerce which has led to a strong demand for urban logistics assets,” Patel says. “I don’t see healthcare as an immediate beneficiary though because it’s going through a loss of revenue and facing cost pressures in the short term, although longer term it will benefit from the aging population trend. On the other hand, build-to-rent was always having positive fundamentals, because of the shortage of housing stock in various cities, but you need to make sure it’s affordable.”

Not surprisingly, retail and hospitality remain largely unloved, with 58 percent and 38 percent of respondents planning to invest less capital, respectively. Of investors, 45 percent say they will invest less capital in offices, which is largely linked to covid’s workplace disruption and its impact on the economy and the labor market, market participants say.

Patrick Kanters, managing director of global real assets at APG Asset Management, sees opportunities in offices – for instance for developments in Asian markets where there is a lack of high-quality supply. But he notes they are “super selective,” as business confidence remains muted.

For Bill Schwab, founding partner of LCI Real Estate Investments and former real estate head of sovereign wealth fund Abu Dhabi Investment Authority, although there’s significant uncertainty in the use of office space, the trend for urban densification will not reverse, acting as a tailwind for the office sector. “Productivity in big cities is much higher than rural areas because there are more interconnections, which leads to more creativity and economic activity. Big cities provide greater GDP contributions because of these efficiencies in the urban fabric. I believe urban densification will continue beyond covid.”

A noteworthy – and hopeful – finding is that 88 percent of investors will not relax their ESG policy as it relates to private markets fund investments as a result of the pandemic.

“It’s a bare necessity to have a strong responsible investment strategy in place. It’s not just about complying with the Paris agreement to mitigate climate risk but actually making a difference from a value perspective. ESG policies are necessary to make sure that your assets will witness a continued strong return – and more and more parties are becoming aware of this,” Kanters notes.