HUNTINGTON BEACH, Calif. — Attendees at the Public Funds Summit strained to hear some good news among gloom and doom over the economic outlook presented by some speakers.
While the credit crunch's effect on both traditional and alternative asset classes and the possibility of a recession peppered many panels at the conference, sponsored by Information Management Network LLC, New York, there were some signs of hope.
Presenters said many quantitative strategies have rebounded. And while private equity, generally a strong source of returns for many public funds, will be especially hurt by the credit crunch, there are still areas like infrastructure that can thrive.
Panelists, though, couldn't predict when the credit crisis will turn around.
“It depends on which cycle we're talking about,” said Larry Pokora, senior vice president of investor relations at Paulson & Co. Inc., New York, the $29 billion hedge fund known for making the right bet on the credit markets.
Mr. Pokora told attendees that the residential real estate market will bottom out in 2009 and pick up again in 2010. But a ripple effect is now being felt in auto loans, credit card securitization and other industries, he said. “So these still need to flush their way through.”
During an interview on the sidelines of the conference, panelist Rajeev Seth, founder and principal consultant at BeatIndex Inc., a Cupertino, Calif., quantitative investment research consulting firm, said: “The whole investment management industry has to look at the negatives ... because that is the catalyst on what you base investment decisions.”
Quantitative strategies in particular were pummeled in August but quickly rebounded, he told attendees. He said August turned out to be a “non-event,” and quant strategies will continue to add value.
There was a slightly dimmer outlook on private equity. The mega-buyout funds that depended on credit most are in particularly bad spot, according to speakers in a private equity session.
“The debt market was the grease that oiled the private equity system,” said Edwin Burton, trustee at the $60 billion Virginia Retirement System, Richmond. Private equity managers can no longer rely on easy credit and growing valuations to bring in returns, he said.
“Private equity has become more of a tinker-toy business,” said Mr. Burton. Managers have to buy companies and learn how to grow them if they want to succeed in the current environment. “That's a different business than just buying it by the numbers and flipping it.”
William Charlton, managing partner at the $200 million Context Private Equity Alpha Fund, a fund of funds, agreed. “One of the things we've never liked is mega-buyout funds because of their reliance on debt,” he said. “What we like are very hands-on managers,” said Mr. Charlton, adding that Context usually targets smaller growth buyout funds whose executives know the ins and outs of the industries in which they work.
But not all of the private equity market is doomed. A strong secondary market has developed for limited partnership interest in top-tier funds, said Mr. Burton. “Virginia has $5 billion to $6 billion in private equity, and we're not running away from that,” said Mr. Burton. “But we've been a seller in that market.”
The secondary market grew to an estimated $63 billion globally in 2007 as banks and other institutions began peeling away their private equity interests (Pensions & Investments, March 3).
