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Investors look to less correlated alternatives. Bodes well for ILS: Eaton Partners


Institutional investors are generally looking to stick with their private market allocations, despite the dislocation caused to financial markets by the Covid-19 coronavirus pandemic, with sources of return that exhibit lower correlation seen particularly favourably, a survey by Eaton Partners found.

eaton-partners-logoEaton Partners, which is part of the Stifel Financial Corp. group of companies and one of the largest capital placement agents and fund advisory firms, polled limited partners of institutional investors for their views on allocations at this challenging time.

In the main, the survey focused on private market asset classes, which would include alternatives such as insurance-linked securities (ILS) and reinsurance-linked investments, found that the majority of institutional investors (64%) plan no changes to their private market allocations at this time, despite the coronavirus pandemic related volatility.

Encouragingly some 15% of those polled said they are planning to increase their allocations to the private market asset classes, but at the same time some 21% are planning to reduce them.

As we’ve been documenting, the financial market volatility caused by the pandemic crisis has driven some impacts to the ILS market, in particular the catastrophe bond segment to begin.

These fully securitised and secondary tradable catastrophe reinsurance instruments could be easily sold and so some more generalist investors, or those requiring cash, have been selling out of the cat bond market in recent weeks.

Which presented an opportunity for those more specialist ILS fund managers or dedicated ILS inevstors, who were able to pick up the sold cat bonds at below par pricing.

More broadly in ILS and reinsurance-linked investing, the next concern is really investor sentiment globally and how that could affect allocations to the ILS sector.

But Eaton Partners survey shows that private market asset classes can still expect to see some inflows, despite the dislocation and told us that alternatives and assets showing a relative lack of correlation could be particularly in demand, which may be a positive for the ILS market as the volatility settles down.

It’s important to put that demand in context though and Eaton Partners also warns of a “precipitous drop” in private capital fundraising for alternatives and that this could remain depressed for some time.

“While we do see LPs committing to GPs already in the process of underwriting, we also expect there will likely be a decrease in overall fundraising activity over the coming months,” explained Jeff Eaton, Partner at Eaton Partners. “Private capital fundraising activity typically has lagged the public markets by two quarters as denominator effect impacts and updated fund valuations take hold.”

One area of focus for investors looking to make allocations in the wake of the pandemic is expected to be those alternative asset classes that offer the strongest uncorrelated returns to the public equity markets, Eaton Partners believes.

Speaking with Artemis, Peter Martenson, Partner at Eaton Partners highlighted that, “We find that LPs are looking for “uncorrelated assets” given the volatility in the public markets.”

He further explained that in recent years LP’s had been moving into uncorrelated assets in order to complement their extensive equity oriented portfolios.

At the same time, Martenson said, the “breadth of uncorrelated assets and strategies now available to LPs has expanded over the recent years as well.”

“With the recent market volatility, we have seen LPs articulate their appreciation for the uncorrelated assets that they are currently invested in.”

Martenson also told us that as well as looking to take advantage of the volatile investment climate by targeting the dislocation in the credit and equity markets, investors are also looking to reduce the overall volatility at the same time, “which can only be achieved by further investing into uncorrelated assets.”

All of which bodes well for ILS and reinsurance-linked assets remaining an attractive option for institutional investors at this time.

Finally, Eaton Partners also noted that it is vital investment managers are ready and able to explain the nature of their strategies, including the correlation (or lack of) story.

“As our survey indicates, there will also be pockets of relative strength,” Martenson said. “Investors are determining what’s on their priority list for new, interesting ideas and moving the best ones to the forefront. We expect successful fundraising will require GPs to be more focused, articulate, and transparent than ever.”

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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