Navigating 2024: Key Considerations for Endowments and Foundations.

Endowments and foundations are somewhat unique due to their long-term investment horizons. While this model can help them endure short-term market fluctuations, they have not been immune to some of the challenges that many investors have faced in 2024.

With the global investment landscape remaining unpredictable from both economic and political perspectives, Quest highlights why a diversified approach to investing is more critical than ever for this group of investors.

Inflation:

One key factor that endowments and foundations are grappling with is the high inflation levels that contrast sharply with the more stable conditions of the past decade. According to the IMF, inflation rates in advanced economies are projected to hover around 3% in 2024, while emerging markets may experience rates as high as 7.8%, significantly impacting real returns.

To navigate this, re-envisioning exposure to higher-returning asset classes is more important than ever.

One area that has consistently outperformed in high-inflation environments is lower mid-market private equity. According to Cambridge Associates, small-cap PE funds have outperformed large-cap funds by an average of 3% per year over the last two decades.

However, many smaller foundations and endowments may struggle to access these opportunities or gain sufficient conviction through due diligence. Partnering with seasoned advisors can bridge this gap. At Quest Fund Placement, we align our interests closely with our clients by investing alongside them in the groups we recommend, ensuring that our due diligence meets the highest standards of rigor.

Geopolitical Tensions:

In 2024, the global investment landscape is filled with emerging risks, particularly geopolitical tensions.

To mitigate these risks, it's crucial to diversify investments across different regions. Endowments are currently underweight in Europe, with European allocations comprising only 13% of the average U.S. endowment’s portfolio—less than 50% of their relative weighting to U.S. exposure.

As specialists in European markets, Quest Fund Placement can help these entities gain access to these underrepresented opportunities, providing a crucial balance to their portfolios.

Overheated Markets:

While U.S. markets have been historically robust, they are increasingly expensive. The S&P 500's average P/E ratio (which we believe is a good proxy for pricing in private markets) is currently around 30, significantly higher than the historical average of 15. In contrast, European markets offer more attractive valuations, with the Stoxx Europe 600’s P/E ratio averaging 15 in recent months.

This discrepancy presents an opportunity for endowments to capitalize on the relatively undervalued European market, in contrast to the “hot” U.S. market.

Conclusion:

Endowments and foundations tend to adopt a strategic and diversified approach to investment in 2024. The challenges of high inflation, geopolitical tensions, and overheated markets underscore the need for strategic adjustments. By considering higher-return asset classes such as lower mid-market private equity, rebalancing portfolios to include underrepresented regions like Europe, and working with seasoned advisors, these institutions can better position themselves to achieve their long-term goals.

At Quest Fund Placement, we are committed to guiding our clients through these turbulent times with tailored, expert advice and aligned interests. With over two decades of experience in European private markets, we understand the challenges endowments face in navigating the European landscape. We leverage our established relationships and in-depth market expertise to streamline the investment process, granting you access to the most promising opportunities.

Last year, one-third of our capital raised came from U.S. investors, with a remarkable 35% increase in American capital commitments to our European funds.