Expert: James Lowe, Sales Director, Private Assets and Investment Trusts, Schroders Plc Facilitator: Rupert Neville, Consultant
Headlines:
- The democratization of private markets through new product structures like long-term asset funds (LTAFs), regulatory changes enabling wider distribution, liquidity management approaches, and the benefits and challenges of incorporating private market exposure into client portfolios
- The mechanics of LTAFs, including liquidity management through portfolio construction aligned with underlying asset cash flows and redemption caps
- The reclassification of LTAFs for easier distribution to retail investors and the potential inclusion in tax-advantaged accounts like SIPPs and ISAs
Discussion points:
The growing private markets segment has seen significant growth over the past decades, reaching nearly $13 trillion in assets under management. This growth has been driven primarily by institutional investors such as sovereign wealth funds, endowments, and pension funds. However, it was highlighted that the next phase of growth is expected to come from the 'democratization' of private markets, with new product structures and regulatory changes enabling wider access for individual investors.
Rationale for private market exposure
Data to support the case for private market exposure was shared, noting that the number of listed companies in the US and UK has declined substantially since the mid-1990s, with many companies choosing to remain private for longer periods. Additionally, statistics show that 87% of US companies with over $100 million in revenue are privately held, suggesting that investors without private market exposure may be missing out on a significant portion of economic growth and wealth creation. Private Markets, for the right investor, provides diversification and portfolio optimisation, with returns often not correlated to equity and bond markets
Long-term asset funds (LTAFs)
LTAFs are a new product structure designed to facilitate retail investor access to private markets. The regulatory changes that have reclassified LTAFs were explained, making them more accessible to advised and discretionary retail clients without the need for opt-up procedures, along with the liquidity management approach used in LTAFs, which involves aligning the fund's dealing terms (e.g., monthly subscriptions, quarterly redemptions with caps) with the underlying assets' natural cash flows.
Ensuring fund terms are clear on redemption policy and that LTAFs were long term investments is key.
Regulatory updates and challenges
The presenters provided an overview of the regulatory landscape surrounding LTAFs, including the potential for inclusion in tax-advantaged accounts like SIPPs and Innovative Finance ISAs. However, they acknowledged ongoing challenges, such as the need for market infrastructure to support these products on platforms and the complexities of incorporating LTAFs into unitized vehicles. Concerns were raised about valuations, transparency, and the potential for liquidity mismatches, with discussions around managing client expectations and suitability assessments.
Implementation and client suitability
The practical considerations for incorporating private market exposure into client portfolios. Interest and adoption varied across the wealth management industry, with some firms actively building private market programs to compete for high-net-worth clients, while others remained hesitant.
Discussions centred on identifying suitable clients, such as former business owners or those with existing private market experience, and determining appropriate allocation levels based on individual circumstances and risk profiles.
Key takeaways:
- Evaluate the suitability of long-term asset funds (LTAFs) and other private market investment vehicles for specific client segments, considering factors such as risk tolerance, investment objectives, and existing exposure to private markets
- Develop a comprehensive understanding of the liquidity management approaches employed by LTAFs and other semi-liquid private market funds, including redemption caps, portfolio construction aligned with underlying asset cash flows, and potential gating mechanisms during periods of market stress
- Stay informed about ongoing regulatory developments related to the distribution of LTAFs, including potential inclusion in tax-advantaged accounts like SIPPs and ISAs, as well as any changes to marketing rules or suitability requirements
- Assess the potential benefits of incorporating private market exposure into client portfolios, such as diversification, access to a broader range of investment opportunities, and the potential for enhanced returns, while carefully considering the associated risks and challenges, including valuations, transparency, and liquidity constraints
- Develop educational materials and communication strategies to effectively convey the characteristics, risks, and potential benefits of private market investments to clients, ensuring that they have a clear understanding of the long-term nature of these investments and the potential for limited liquidity during certain market conditions
- Collaborate with product providers, platforms, and other industry participants to address operational and infrastructure challenges related to the distribution and servicing of LTAFs and other private market investment vehicles within the wealth management industry
