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Why Oregon Treasury, Carnegie are pausing new manager relationships

Carnegie Corporation’s Alisa Mall called committing to new managers 'the equivalent of getting engaged to someone you’ve only talked to on your screen.'

As investors reevaluate their investment decisions to factor in the new covid-19 reality, specialist managers, managers eyeing new investor groups, and particularly those marketing seeded strategies, could end up bearing the brunt.

During a webinar hosted by the investment management software provider Juniper Square on Tuesday, Alisa Mall, director of investments at the philanthropic foundation Carnegie Corporation of New York; Chris Ebersole, real estate investment officer at the Oregon State Treasury; and Christy Gahr, a principal at the investment consulting firm Meketa Group, all said their respective firms remain in the market for investment opportunities. However, social distancing mandates have forced them to change how they approach commitments.

Then overnight it was, ‘I don’t want your seed portfolio, it cannot possibly be worth what it was when you purchased it, and why would I buy into a pool of existing assets?’
Christy Gahr, Meketa Group

Mall and Ebersole both said they would be unlikely to commit capital to a manager they had not met before in person.

“We have more or less put a soft hold on new manager relationships at this point,” Ebersole said. “We have seen through the investments we were in due diligence on before this, and we have got a number of opportunities to allocate more capital to existing relationships, but at the end of the day, if it is a new manager for the commitments we are talking about making, it is tough to get to the finish line without being able to sit in a room with somebody. I don’t see that changing.”

Mall said her team has discussed amending their policy toward new relationships given the current environment. Though they remain open to the idea “philosophically,” she said it would be difficult embrace in practice: “It’s the equivalent of getting engaged to someone you’ve only talked to on your screen. These are big commitments, and most are illiquid.”

To seed or not to seed?

Prior to the outbreak, many of Gahr’s clients also insisted managers have a seeded portfolio of assets before agreeing to commit capital. This helped investors get some level of visibility into the strategy, as well as get a sense of the manager’s track record.

“Then overnight it was, ‘I don’t want your seed portfolio, it cannot possibly be worth what it was when you purchased it, and why would I buy into a pool of existing assets?’” Gahr said.

Small investments have not been met with as much resistance, but if the seed portfolio is 20 percent of the fund or more, investors are more likely to push for a creative solution, she added.

Some managers, however, have stood by their convictions, arguing that their investments were sound and refusing to change course. Others, Gahr noted, have been more accommodating and have worked with existing investors to create sidecars structures that insulate new commitments from assets purchased just before the crisis.

Allocations revisited

The Carnegie Corporation, the philanthropic foundation established by American steel magnate Andrew Carnegie, has typically favored small, specialist managers within its real estate allocations, Mall said. However, the levels of distress expected in the coming months and years have made her reconsider that approach.

“Something I’ve spent a lot of time thinking about is, on a go-forward basis, do we want to shift that balance so we have more exposure, over time, to groups that can play up and down the capital stack, that can pivot and take advantage of different things opportunistically when they think the time is right,” she said.

Meanwhile, Ebersole said Oregon will continue to grow its multifamily exposure, a focus area for the investor for close to two years. He is also expecting more opportunities to arise in the office. “There will probably be folks looking to get out of office and there will probably be some opportunities there.”

Gahr expects the hospitality sector to provide both debt and equity investment opportunities. However, she also noted that recovery may be a long way off, based on early data from the Asian markets, where hotel occupancy levels are still as low as 30 percent.

“If you look at Asia and say it is a quarter ahead of us, the US is going to have a long battle upwards,” she said. “It will take time for the consumer population to come back, it will take time for business travel to come back up, most events are canceled at least through the third quarter right now and many are looking at bumping them back into 2021. I think there will be quarters of pain for hospitality, not months and hopefully not years.”