Alternative Allocations: A CIO’s perspective on allocating to alts

In our most recent episode of the Alternative Allocation podcast series, I had the opportunity to sit down and discuss a range of issues with my good friend Scott Welch, from Certuity. Scott brings a unique perspective as a long-time CIO with a deep appreciation for alternative investments. We discussed the role of alternatives in client portfolios, evaluating funds, product evolution, and allocating enough capital to increase the likelihood of achieving goals.

Scott and I discussed the evolution from drawdown structures to evergreen structures, and how they can be used by investors. Scott stated that, “I think that the evergreen facility is a natural fit for private credit. The money gets right to work. There's no J curve.¹ People start generating income right away. It's a 1099. Right, so there's a lot of positive aspects to the evergreen structure.”

Given Scott’s experience, I wanted to probe more into evaluating funds and managers. “So, as a point of view, I think you start with the basic four P's of due diligence—people, philosophy, process, and performance. If you don't like the people, stop there.” With respect to philosophy, Scott offered some insights regarding what advisors should be evaluating: “Do you believe the approach can work consistently over time?”

If the people, process, and philosophy make sense, then you can evaluate the performance of the manager and similar funds. Scott and I discussed the large dispersion of returns between the top and bottom private markets managers, and emphasized the importance of seeking to allocate capital to the best managers, and avoiding the bottom performers.

Scott noted that, “. . .  there is history that shows that the top quartile managers are consistently in the top quartile and those are the folks you need to get access to.” This makes intuitive sense since the top general partners are seeing all the deal flow.

I wanted to know where Scott thought the most attractive opportunities were today. He indicated they have made significant investments in private credit and are feeling more constructive on real estate as valuations have come down. We also discussed one of our highest conviction ideas—secondaries. “The traditional sources of liquidity for the private equity sponsors have not been there as much as they have been in the past. Mergers and acquisitions, strategic sales, and initial public offerings have not been as robust as in the past, and that's creating, significant discounts and opportunities within the secondaries market.”

Lastly, we closed out the interview by discussing how he allocates to alternative investments. While every client is different, and advisors should evaluate their client’s circumstances, it was instructive to hear Scott describe the way that he thinks about alternatives. He indicated that clients often have a 10% allocation to hedge fund strategies (macro, multi-strategy, etc.); and a 10%-15% allocation to private markets (private equity, private credit, and real estate). Depending upon what they are solving for, clients could have higher or lower allocations to private credit or private equity.

Scott was very generous with his time and his insights. He shared his experience in evaluating funds and allocating capital.

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