Why wealth managers need to increase access to private market investments
With interest rates near historic lows, public equity market valuations elevated and bond yields providing slim pickings, it has been extremely challenging to generate returns in traditional assets in recent years.
This backdrop has spurred investors to seek broader options to put money to work. By 2020, $13.5 trillion of total assets under management (AUM) had been allocated to alternative assets, including private markets, hedge funds and other more niche investments, according to Boston Consulting Group’s (BCG) most recent data. Private markets accounted for $8 trillion of that, with private equity in particular attracting the most private market capital ($5.3 trillion)—more than double the $2.4 trillion that was allocated to private equity in 2015.
The appeal for individual investors to get involved in this private market boom is clear: returns are typically higher than are up for grabs in the public markets. Private equity investments saw a ten-year median annualised return of 12.3% in 2020, compared to 11.22% for public markets, according to a 2021 study from the American Investment Council [1].
Importantly, distribution of returns is much wider for private equity than for listed equity. Last year, net internal rate of return (IRR) for top-quartile global private equity funds was 30.5% across 2008 to 2018 vintages, the highest-performing private markets asset class, according to McKinsey’s Global Private Markets Review 2022 [2]. Therefore, if investors can access top-tier private equity firms, the outperformance can be even more significant than at the median.
Finding the right funds
But some wealth managers may lack the expertise to advise clients on the suitability and the availability of different private equity investments, while smaller firms may have insufficient capacity to handle the investment process.
“How do you find those funds; how do you engage with them and then how do you do the due diligence? You need people who know what they’re doing and most investors with less than $1 billion in assets under management don’t really have that resource in-house,” Titanbay chief executive officer Thomas Eskebaek said in an interview with Raconteur in the Sunday Times in December 2021.
Yet technology is starting to break down the barriers that have traditionally excluded individual investors from accessing private markets. Tech-based feeder fund platforms can enable wealth managers to offer clients a range of top-tier private market funds, effectively making it possible for their clients to build their own bespoke portfolios.
This technology is also making it easier for private equity funds to diversify their fundraising sources without having to interact directly with individual investors or wealth managers—an admin burden that could otherwise be too complicated and time-consuming for general partners to bother pursuing.
With as much as $1.2 trillion of additional AUM expected to be pumped into private markets by high-net-worth individuals by 2025 [3], wealth managers need to ensure they are offering access to this asset class to meet that growing client demand.
[1] https://www.investmentcouncil.org/wp-content/uploads/2021_pension_report.pdf
[3] https://web-assets.bcg.com/36/e6/5e6897294b22908b44c9a19d182b/bcg-icapital-the-future-is-private.pdf
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