A Destination for Asset Allocators
The ongoing low interest rate environment has affected scores of asset allocators that for years have relied on lower-risk investment strategies for portfolio returns. Among those who have generally been impacted the most by a lack of portfolio diversification are healthcare organizations. According to a report from Cerulli, 93% of health and hospital systems say that the interest rate environment is a top challenge. The same rate (93%) also said that meeting return objectives is a top challenge.1
As with other asset allocators, healthcare organizations are considering alternative assets – and private capital investments in particular – as attractive solutions for growing returns. In a recent survey conducted by Northern Trust, a number of healthcare clients noted they had worked to increase their private capital allocations over the last five years.
However, increasing allocations to a complex asset class does raise key operational challenges. To optimize their investment operations and deepen their understanding of portfolio risk and performance, healthcare organizations should familiarize themselves with some pain points they’ll likely face, in addition to the solutions and services that will help them respond to these challenges.
In surveying Northern Trust healthcare clients, the following common challenges were identified:
- Scaling allocations – When healthcare investment teams – or any asset allocator newer to the alternative asset world – look to increase their exposure to alternatives, allocation goals cannot be met immediately. Scaling up takes time as allocators seek the right managers and investments. Often, for newer investors in private capital, allocators will seek emerging or mid-market private capital managers which set lower capital requirements than large managers. However, evaluating this category of managers may take time as the field of new alternative managers grows crowded and emerging managers have shorter track records.
- Growing alternative investment teams – Some allocators that are new to alternative investments often do not have dedicated teams to cover the asset class, or if they do, many have lean teams with other responsibilities. In Northern Trust’s survey, multiple respondents noted that they either do not have dedicated alternatives investment teams or had only one or two team members focusing on the entire asset class. Properly vetting alternative asset managers and specific investment opportunities requires significant time and expertise, typically requiring the attention of more than a single team member. However, scaling up a dedicated team, especially if setting up two teams between various alternative investments like private markets and hedge funds, is a time-consuming process.
- Performing due diligence on alternative managers – Throughout the pandemic, performing due diligence on asset managers has become increasingly challenging since much of the process had occurred in person before COVID-19 affected the work environment. Virtual due diligence is possible and has been a growing practice as the industry embraces a fully remote or hybrid work environment. Survey respondents indicated they are more comfortable investing with managers with whom they have existing relationships because of new manager due diligence challenges.
- Analyzing portfolio risk and performance – Private market investments often lack transparency as the underlying investments of such funds are illiquid and infrequently valued. As private assets make up larger portions of healthcare organizations’ portfolios, they’ll need to access the right technology, tools and services to understand the risk and performance those investments present.
- Assisting back-office operations with an alts-heavy portfolio – Healthcare organizations often face complex back-office operations. Due to stakeholder interests, they’re often required to close their books on a strict schedule each month, while other asset allocators may be able to keep their books open for longer. Introducing alternative assets into a portfolio makes a regimented back-office operation more complex, and healthcare organizations with larger allocations to alternative assets may find themselves needing assistance from a service provider as they work through portfolio, accounting and financial reporting processes.
Alternative assets’ potential for above-market returns is attractive for most asset allocators, particularly in the current investment environment. However, there’s no denying the challenges they bring for an institutional investor’s operations. As healthcare organizations continue to consider their alternative asset allocations, they’ll want to ensure they’re partnered with the right service providers to handle new operational challenges.
More than that, healthcare institutions should ensure they can partner with a provider who can service a range of needs, so as to potentially provide the organization a full picture of their portfolio activities. For example, an experienced service partner could help a healthcare organization embrace the process of operational due diligence in a remote work environment, while also providing the right tools and data views customized for alternative-heavy portfolios.
The alternative asset space continues to present new investment managers and new investment opportunities. Asset allocators like healthcare organizations who are considering an allocation to the asset class should take account of the necessary capabilities, from a dedicated investment team to an experienced service provider, in order to benefit from subject matter expertise to efficient operations.
To learn more about how Northern Trust helps healthcare organizations service their assets, reach out here.
1 Institutional Investor, “Health-Care Systems Want More Alternative Assets. But Can They Get Them?”, February 27 2020.
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