Strategy and performance outpace ESG and diversity in manager selection, survey finds

ESG considerations and diversity among management teams rank low as a priority when sourcing managers, according to a recent survey conducted by law firm Seward & Kissel largely answered by family offices, funds-of-funds, endowments, seeders and other investors.

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, Seward & Kissel’s 2022 Alternative Investment Allocator Survey said otherwise, and that investment strategies and a track record of performance were overwhelming the most importance factors when choosing a manager.

According to the survey, over 40 percent of respondents said ESG and investment team diversity were the least important issues when sourcing managers while over 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. 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,” said Daniel Bresler, a partner at Seward & Kissel.

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.

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.