Smaller LPs say ESG and diversity aren’t big factors when picking managers

ESG considerations and diversity among management teams rank low as a priority when sourcing managers, according to a new survey of LPs who are mainly high net worth individuals, family offices and funds of funds.

Many sources familiar with how LPs outside of public pension plans invest have said that they have witnessed a massive increase in interest in ESG and impact investing over time. However, law firm Seward & Kissel’s 2022 Alternative Investment Allocator Survey found that investment strategies and a track record of performance were overwhelmingly the most important factors when choosing a manager.

Survey respondents were primarily HNWIs and family offices (33 percent) and funds of funds (27 percent). Accounting for 10 percent each of the total were groups comprised of endowments, foundations and non-profits; investment consultants and outsourced CIOs; and seeder funds. Corporate and government and pensions represented just 3 percent of the total, while the remaining 7 percent fell into the “other” category.

The typical allocator’s check sizes are on the small side, with 57 percent of participants saying their average allocation ranged from $1 million to $15 million. The next largest group (23 percent) said their average allocation ranged from $51 million to $100 million.

According to the survey, more than 40 percent of respondents said ESG and the diversity of an investment team were the least important issues when sourcing managers, while more than 90 percent said the most important factor was investment strategy. Performance track record also ranked as a very important category when selecting managers.

“One of the big surprises was how low ESG scored in what allocators are considering when choosing investments,” said Daniel Bresler, a partner at Seward & Kissel. “It makes sense that investment strategy and a track record of performance would be really important for allocators. We don’t think ESG is going away anytime soon, but it has maybe been placed on the backburner because of concerns with Ukraine and markets going crazy.”

The survey also found that over 80 percent of respondents plan on either increasing or keeping the same amount allocated to private equity in 2022. Other asset classes where respondents said they expected to increase allocations include infrastructure and digital assets.

More than half of respondents said they expect “no change” to their allocation to venture capital this year, while less than 20 percent said they expect to increase their VC allocation.

The survey found differences in allocation strategies among different kinds of LPs. “Endowments, foundations or non-profits participants expect to increase allocations to digital asset strategies,” the survey stated. “HNWI/Family Office participants expect to increase allocations to primarily illiquid strategies, including infrastructure, private equity, private debt, private equity real estate as well as digital assets.”

Emerging managers are popular among this class of investors, with 73 percent of survey respondents answering they have invested in investment managers founded less than two years ago. A similar percentage of respondents also said they expect to commit an average allocation size between $1 million and $50 million next year.

These results reflect the difficulties many smaller LPs face in a highly crowded marketplace that makes it very difficult for smaller investors to source deals against public pension plans that can offer commitment sizes needed to get into the biggest deals.

Bresler also said that smaller LPs have also found they can get better side-letter terms and other benefits by investing in early stage managers.

Family offices said in the survey they will utilize co-investments and SMAs at levels far higher than other types of investors.

“Family offices don’t have the same levels of control and board oversight that you see with an endowment. If they think a co-investment strategy is viable, they can move quickly,” Bresler said.

Additional reporting by Lawrence Aragon for Venture Capital Journal

This story first appeared in affiliate title Buyouts