Alts exposure growing in Mercer’s OCIO business

Based in Sacramento, she works closely with Bill Muysken, who is Mercer’s global chief investment officer for alternatives. In this role that she took on in December she is a successor to Donn Cox, who stays on to advise through this month and was the founder of Pavilion Alternatives Group, which Mercer acquired in 2018.

She reports directly to Rich Nuzum, who is president of Mercer’s wealth business. Previously, Lambert was global head of private debt at Mercer and prior to that had been with Pavilion since 2004.

She sees that much of the growth in the alternatives business is attributable to OCIO services. OCIO’s focus is on a unique investor set that needs an external investment team to lead the effort in allocating assets and to provide access to and knowledge of a greater number of investment opportunities.

Last year, Mercer’s OCIO business surpassed the $300 billion milestone in assets under management. Of that sizable amount, approximately $20 billion is in alternatives with the biggest growth areas being infrastructure and private debt, according to Lambert.

For most investors relying on Mercer’s OCIO services, alternative strategies are not in their niche and they don’t have the team to manage them, said Lambert.

The most recent close in the last month of Mercer’s fifth Private Investment Partners (PIP) fund at $2.7 billion showed the level of interest soaring in the space. Mercer PIP V is the fifth in a series of offerings providing access to private equity, private debt, infrastructure, real estate, real assets and sustainable opportunities.

Combined, Mercer has roughly $182 billion in alternative assets across its consulting and OCIO businesses and has built a global investment team that few investors could replicate on their own.

It is the OCIO space though where much of the alternatives’ growth is happening, according to Lambert. She said that investors have increased their investment in private equity – including growth equity and venture capital – and then in real estate and infrastructure.

With CAGRs of about 50% over the last few years, real estate and infrastructure have been an intriguing return proposition for investors, she added. In her experience, investors by and large are bucketing their assets based on risk profiles rather than traditional vs. non-traditional investments.

One of the trends of the past couple of years too have been capital solutions-oriented strategies. These bring together the best across the alternatives’ spectrum such as private debt and equity capabilities to create a hybrid solution that can solve company’s financing solutions.

“I think that is a real exciting development,” she said. “It allows general partners to bring expertise across the spectrum and in creative ways.”

Specifically, within infrastructure and private debt Mercer has witnessed a lot of growth, even outside developed regions as there has been growth in projects globally. The deals are now less complex with longer lock-ups seeing less interest.

Within private debt there is surging interest, and Mercer directs clients to build a portfolio based on senior secured level of lending and then add on mezzanine and special situations and opportunistic credit buckets.

The investors themselves can fall into buckets too. For instance, the least risk-averse investors such as sovereign wealth funds are interested in building strategies across private equity and other alpha oriented strategies, said Lambert.

Pensions tend to be more conservative due to liabilities. She added that these clients are focused on absolute returns and seek to partner with core managers in co-investment strategies or funds of one that allow them to deal with a single manger with multiple strategies to scale the relationship.

Meanwhile, endowments and foundations tend to be the most sophisticated with healthy allocations to private markets. This group’s need for liquidity is low and they tend to be most interested in private equity strategies that are growth equity oriented, according to Lambert. Family offices are also looking for tax-efficient structures that can generate returns with higher risk.

Insurance companies generally are also looking to get into private debt in search of income streams, she added.

The client variety is likely poised to grow as well as Mercer eyes strategic partners such as RIAs that historically have been not able to access alternatives. But that is poised to change with platforms taking aim at the space, according to Lambert.