What really matters in alternatives manager selection

When it’s time to add a new manager to the portfolio, the first metric most investors look at is returns – and for good reason.  

But it’s not just about whether a manager can deliver for the portfolio, but whether you can build trust with them, according to Chloé Brayne, head of private equity and unlisted assets at Colonial First State.

“Can you trust them to deliver what you think they’re going to do?” Brayne (pictured, centre) told The Inside Network’s Alternative’s Symposium. “We spend a lot of time with managers looking to understand that as part of the diligence process. There’s obviously a really rigorous selection framework that looks at historic al performance, but also what you’re expecting them to do going forward.”

Part of that trust comes from understanding exactly how they’re incentivised – especially in alternatives, where remuneration structures can be at best complex, and at worst inscrutable – and another part from governance.

“Do they have people on the ground in Australia, people that you can call up to get accountability from? What does that reporting framework look like? Are you getting enough information coming through on the underlying stock selection so that you can make a decision if they’re performing and if they’re delivering what you’re expecting them to for the portfolio? Governance is really important for us because of our scale and size. We’re able to get really strong positions and really good visibility through that reporting.”

Good manager selection mostly means disregarding the pitch deck, said Daniel Kelly, partner and head of alternative investments at Kelly+Partners Private Wealth, because every pitch deck is amazing.

“Having a face-to-face conversation with the manager will tell you a lot that the marketing material probably hides, and we implement that as part of our due diligence process,” Kelly (pictured, right) said. “And the incentives point is crucial with alts, because you can get some really cheeky performance reward structures that are kind of inherently at odds with what the manager is trying to do, particularly in private credit.”

“So we kind of steer away from managers that have performance fees with really low hurdles, because it kind of inherently incentivises them to take risk and to generate excess return when maybe their job is just to produce stable income.”

But there’s more to performance than just the return, Brayne said.

“I’d be looking at the drivers of how they got that return. Was it just buying low, selling high? Were they bringing something else to the picture? And sometimes that’s okay – just buying in the cycle. But if you think your manager is actually supposed to be driving operational value then you might take a step back and go ‘Well is this manager actually delivering what we thought they would for the portfolio?’”

“Obviously we get a lot of pitches and a lot of managers coming through. I’m always interested in what makes them different to everybody else. What can that manager deliver that just doesn’t look like everything else in the market?”  

Tahn Sharpe

Tahn is managing editor across The Inside Network's three publications.