Leveraging platform technology to minimise the risks and costs a wealth manager incurs in offering private markets investing to their clients.
Expert: Adam Harrison, Managing Director of Investor Relations, Titanbay
Facilitator: Giles Patterson, Director, Aon Client Insight
Key takeaways:
- Access to a growing number of private investments solves the lack of choice and diversification within the public marketplace.
- High minimum investments and complicated to navigate structures are off putting.
- Platforms can pool assets and thus bring scale and accessibility.
- AUM are not a vital consideration at this point but having good intelligence and analytics around a private company are key.
- An evolutionary approach and client experience will be crucial.
- There will be a massive increase in allocation and those that don’t have private funds as part of their toolkit will be left behind.
Context
Private market funds have traditionally been out of the reach of most investors due to tight regulation and high barriers to entry. But most wealth managers would have clients on their books with an interest and who would be suitable to invest. Bringing the means to access these funds to such investors is thus, a gap in provision that needs to be addressed.
Why is change needed?
Access to a growing number of private investments solves the lack of choice and diversification within the public marketplace.
An increasing number of companies are choosing to keep their assets private. Companies are waiting longer to go public – the average used to be five years but it is now more like 10.
There are fewer investible assets available on public markets giving rise to diversification issues. Private funds are one of the few areas where there is low correlation to traditional markets and have historically also demonstrated the ability to give good returns.
Private fund availability will grow. PwC forecasts that private fund assets will grow from £4.2 to £5.5 trillion in 2025. They will account for 10% of global AUM by 2025. Thus, there will be significant growth in availability of private funds.
There is no shortage of suitable investors. Currently half of the average wealth manager’s suitable client base are not thought to have any exposure. Allocation to private funds at institutional level, meanwhile, ranges between 20% and 40%.
Barriers to entry
High minimum investments and complicated to navigate structures are off putting.
The sector has historically had high minimum investment levels, based on mangers finding it commercially viable to serve a smaller number of larger investors rather than the opposite.
Disparate investor experience within the operationally complex private funds world where there is no hegemony with regard to structures etc. makes it very hard to build a portfolio.
How can tech help?
Platforms can pool assets and thus bring scale and accessibility.
A platform acts as an enabler; allowing wealth managers to access private funds on behalf of their clients on the same basis as a large institutional investor. A platform also helps with a better service that can be scaled.
Diversity within the funds is a crucial feature which is significant within the due diligence process. Diversity aligns with performance.
What is most important in selecting an investment platform in private markets?
AUM are not a vital consideration at this point but having good intelligence and analytics around a private company are key.
AUM are not a vital consideration. This is, after all, a relatively new marketplace and so AUM will build over time and will grow in importance in terms of building scale - and an associated reduction in cost.
An information gap, where a private corporate is not compelled to share information in the same way as public funds, means the need to have good intelligence and generate an information advantage is very real.
The journey – mapping a roadmap to private funds investment
An evolutionary approach and client experience will be crucial.
Wealth managers have to take clients on a journey - 20% allocation won’t be done all in one go. Fund selection and diversification is key, as is the need to move clients away from opportunistic investing. Instead, the approach should be on a looking to bring minimum investment levels down with that as it evolves.
Care around fees is required and a fee drag is inevitable as investors build up their allocation. A transparent fee structure that is ideally split with the wealth manager, as opposed to in addition to the wealth manager’s fees, is ideal.
Where will this be in three years’ time? Where do the major challenges lie?
There will be a massive increase in allocation and those that don’t have private funds as part of their toolkit will be left behind.
The ability of a wealth manager to navigate the market, understand its complex modus operandi and intercept and interpret data will improve.
It is important to note these investments are not for everyone and that this will not change. The advice of the wealth manger, a robust understanding of the long liquidity profile of private funds and a strong suitability process are all important factors.
However, a larger pool of buyers and sellers will improve liquidity and this will evolve over the next few years.
The Holy Grail is deciding how to best embed private funds within the discretionary offering, how that might look reporting wise and how cash drag and cash allocation will look.
