Mandates Rise with Investor Confidence

By Michael Marolda

Global investor confidence has risen steadily for the past seven months after the worst period of the financial crisis. State Street Global Markets’ Investor Confidence Index rose 3.6 points in July to 119.4 from 115.8 in June. This is a high from the index’s overall low of 82.1 points in October of 2008. BHA measures investor interest in alternative investments through investor mandates. On average, BHA generates about 100 to 120 mandates per week. BHA has experienced a 10 percent increase in year-over-year growth in the number of mandates generated during the summer months, from the first week of June through the second week of August.

This abnormal increase in investor activity likely stems from the market’s turnaround. Traditionally, the summer months are slow; as key decision makers take their vacations and due diligence is put on hold until the last week of August or first weeks of September.

However, this extraordinary year has seen investment teams searching for the best opportunities throughout the summer. Investors are trying to leverage unique market opportunities to make up for the abysmal losses of 2008 and early 2009 when the S&P 500 was off as much as 50 percent from its peak.

As of this writing, the NASDAQ-100 has erased half of the losses it incurred during the bear market and reached 1,637 for the first time since last fall. Similarly, the HFRI Equity Hedge (Total) Index is up 15.94 percent for the year and the HFRI Fund of Funds Composite Index is up 6.16 percent for the year.

Investors are taking advantage of the market’s rising tide to find the proper investments and they are taking advantage of BHA to better source managers for their investment needs.

Healthcare Sector: Broken or Bandaged?

By Richard Rapacki

Throughout the course of the year, analysts at BHA have noticed that investors are split when it comes to predicting the impact of President Obama’s healthcare proposal on returns of the healthcare sector. Assuming it is put into effect, some investors believe the impact will be positive, while others believe it will be negative.

One of the main elements of the proposed plan is that the government would require insurance companies to offer benefits to everyone that applies for coverage; insurers would not be able to decline coverage to an individual based on their current health. If the government forces insurers to provide coverage when it’s not financially beneficial for them do so, it could lead to smaller profit margins. However, it could also increase the number of people who gain access to health care, potentially offsetting the losses.

Another major component of President Obama’s proposal is the ability of the government to limit the amount of time a proprietary drug remains proprietary; it would be up to the government to decide when another company could replicate a drug and sell it for less. This would significantly impact the bottom line of pharmaceutical companies and could potentially impact the speed with which new drugs are fabricated. For example, if a company does not expect to recoup research and development costs before a drug loses its proprietary status, it may delay developing new drugs. On the flip side, a shorter window would allow other companies that produce generic versions of brand name drugs to profit and, thereby, become a source for growth for the industry.

Many investors are pursuing opposite strategies in the healthcare sector. For example, hedge fund Manikay Partners bought roughly $70 million in healthcare stocks in the first quarter Overall, health care represents 36 percent of its U. S. equity portfolio (see http://seekingalpha.com/article/155083-manikay-partners-buy-healthcare-dump-financials?source=article_lb_author). Conversely, the Bill and Melinda Gates Foundation sold almost all of its healthcare investments by the end of the second quarter (see http://www.emii.com/Articles/2275287/Asset-Management/Asset-Management-Articles/Gates-Foundation-Divests-In-Health-Care-Pharmaceuticals.aspx).

Despite the differences of opinion among investors, it is safe to say that healthcare will remain at the forefront of investors’ minds until Obama’s healthcare proposal is either passed or defeated by the U.S. Senate. Either way, it will be quite a while before the effects of healthcare reform are known. Until that time, investors will have strong sentiments—positive and negative—toward the industry

Private Equity Committing to Alternative Energy

By John Ford

After two straight quarters of decline during the end of 2008, and beginning of 2009, investor interest in clean technology dedicated venture capital funds seems to be rebounding recently. Signs of the recovery are not exaggerated and BHA expects the effects will be seen and felt across all segments of the clean tech sector.

Reports show that during the second quarter, VC funds made investments in 94 clean tech companies and totaling $1.2 billion, a 12 percent increase over the first quarter. These venture investments made in Chinese, European, and North American companies are a worthwhile indicator that deals are on the table, and in recent weeks investors have similarly taken notice. Some examples include a U.K. local pension scheme which is currently looking for venture capital funds within the clean technology, sustainability, and environmentally conscious sectors. It is looking for highly experienced fund management teams raising funds with between £250—750 million.

Similarly, a Canadian investment firm which evaluates venture capital funds on an ongoing basis is currently targeting clean tech along with other industry sectors for its next round of allocations. As a Canadian firm, it typically limits its resources to focus on funds focused specifically on the Canadian market.

A Seattle, Washington based wealth advisory firm is looking to allocate anywhere between $1-3 million to a qualified fund. It is focused on venture capital and growth equity funds that are solely dedicated to the clean tech space. Furthermore, the firm is primarily interested in funds that are focused on the Pacific Northwest region of the United States. Sub-sectors of interest include solar and renewable energy, as well as those dedicated to sustainable efforts.

Driving this relatively new frontier in private equity venture investing is, in part, the adoption of new climate and energy legislation by countries worldwide. Such legislation provides an incentive for investors to “go green.” In addition, governments around the globe are allocating billions in stimulus packages designed to induce a recovery in all clean tech sectors. BHA analysts expect interest in such funds to continue from different segments of the alternative investor community.

Hot New Mandates

Brighton House Associates (BHA) is a research organization focused on the alternative investment community. BHA has a team of research analysts who compile information on the active investment searches of the global investor community through direct phone conversations with investors. On average, analysts profile 125 investors per week and gather information about specific mandates or investor searches. These investor mandates include the qualifications and characteristics they are searching for currently in an alternative investment fund.

Hot Long Only Fund Mandate

An Ohio-based consulting firm is interested in researching opportunities from long-only funds focused on trading equities in frontier markets. This search is fairly new and the firm does not have a specific investment timeline; it is in the preliminary stages of due diligence. The firm will consider both country- and regionally-focused funds and is comfortable with initial lock-ups of up to two years. The length of the due diligence process depends on its clients’ requirements.

Hot Fund of Funds Mandate

A Dutch foundation anticipates committing capital to private equity funds of funds during the first half of 2010. It is currently looking to hear from managers so that it may establish relationships and create a short list of potential funds for allocation. The foundation is researching both single- and multi-strategy funds of funds. Generally, it is seeking funds of funds focused on Asian markets and raising €300 to €500 million. For single-strategy funds in particular, the foundation is most interested in those with venture capital or buyout strategies.

Hot Hedge Fund Mandate

An insurance company based in the United Kingdom is opportunistically researching and allocating capital to hedge funds throughout the remainder of 2009. The firm plans to allocate to multiple funds but is not operating on a strict timeline. The maximum stake the firm can take in any one fund is 5 percent. It is primarily interested in credit-related funds, including funds focused on distressed credit, corporate credit, long/short credit, or structured credit. To be seriously considered, funds must have exposure to the United States and have more than $100 million in assets under management.

Hot Private Equity Fund Mandate

A U.S. public pension plan with approximately $11 billion in assets is researching private equity funds. It has dedicated $800 million to alternative investment vehicles and is not fully allocated for 2009. The pension plan is most interested in small-and mid-market buyout funds focused on the United States. It is also reviewing U.S.-focused venture capital funds, however, these are of lesser interest. The pension plan has a preference for generalist funds with returns in the top quartile. It also prefers small- and midsized funds, and typically looks for management teams that have worked together for several years. Future commitments will be about $25 million.

Hot Real Estate Fund Mandate

A large asset management firm with offices in Massachusetts and Connecticut is currently researching real estate funds for potential investment. The firm dedicates approximately 50 percent of its assets to real estate-related investments. It is opportunistic and looking for funds with various exposures. Historically, the firm has primarily invested in U.S.-based funds, however, it will consider non-U.S. funds. It typically allocates $5 million to $10 million per fund.

Investor Data

Editors-in-Chief

Richard Rapacki

rr@brightonhouseassociates.com

508-786-0480, ext. 215

Gabriel Berkowitz

gb@brightonhouseassociates.com

508-786-0480, ext. 214

President and COO

Dennis Ford

df@brightonhouseassociates.com

508-786-0480, ext. 201

Dennis Ford is President and COO of BHA. His expertise is in database marketing, using the Web to create interactive dialog, and using analysis and profiling to understand customer prospects. He is also the author of a well received book on selling called The Peddler's Prerogative.

The Investor Monitor is a general circulation weekly. No statement in this issue is intended as a recommendation to buy or sell securities or to provide advice. Reproduction is prohibited without the permission of the publisher.

In This Issue:

Mandates Rise with Investor Confidence

Healthcare Sector: Broken or Bandaged?

Private Equity Committing to Alternative Energy

Hot New Mandates

Investor Data