(Finextra) - Individual investors hold 50% of the estimated $280 trillion of global assets under management, though their allocation to private capital is just 16% and, in some segments, materially lower.
Until recently, private investors had scorned greater allocation due to structural barriers: high minimum investment thresholds, the need and expectation of a liquid market, the ability to redeem investment in a short time, limited access to funds, the lack of transparency, and perceived higher risk than allocation to the public markets.
These investors are now clamouring for access to the greater returns generated from alternative investments, compared with the public market. As more companies opt to leave or not float on global stock markets, investors realise the need to access the growth characteristics of private companies, coupled with the need for the benefits of portfolio diversification. In conjunction with these shifts in investor sentiment, 2023 has been marked by the collapse of the traditional 60/40 portfolio, which has also accelerated the appeal of alternative assets.
How is the wealth management industry addressing investor demand for access to private markets?
What is apparent is the industry is not taking a uniform approach and may depend on the different market segments – whether UHNWI, HNWI, or the mass affluent sector. Private banks are creating separate teams; for example, Goldman Sachs has built a large private equity group with traditional LPs, though it provides access to private clients. The advent of new technology has enabled online platforms like Germany-based Moonfare and US-based iCapital to offer master-feeder structures with access to an array of PE funds; while listed investment trusts on the London stock market have been the traditional gateway for mass affluent investors, though they can be quite volatile and trade at large discounts to their underlying asset value.
The availability and sophistication of private asset offerings can vary significantly by country – the US seems to be more advanced than the UK. In the US, KKR, and Starwood have initiated real estate trusts and Canada-based Brookfield offers infrastructure based on monthly liquidity and redemption limits. Changes to 401(k) rules in the US mean employees now have the option to include private equity.
In Europe, fund groups Amundi, Schroders, Fidelity, and Abrdn have targeted private assets as key for future growth, though product offerings are still in the nascent stage. However, certain regions, notably Scandinavia, have shown an appetite for innovative approaches to private assets – Formue in Norway has had a private asset offering for many years and serves HNW/UHWN clients.
What will be the short-term outcome?
I think a lot of wealth managers will put their heads in the sand. Some will use their networks to offer PE investment on a fund-by-fund basis, partner with fintechs like Moonfare, or work with institutional asset allocators, for example Atomos’ innovative multi-asset partnership with Willis Towers Watson. For me, the question is whether wealth managers are prepared to invest in the technology today to capture a big growth opportunity in the future.
Traditional wealth managers who offer discretionary and advisory services have been slow to adopt technology. Many firms have prioritised digital adoption to the back office – streamlining processes and simplifying human input. This reduces costs but often also comes at the cost of improving the client experience. A recent Refinitiv wealth management study has shown that 63% of wealth platforms show significant digital capability gaps compared to investor expectations, only 37% of investors globally give their platforms top scores for digital experience, 80% of investors say real-time data would enhance their analysis, and 20% of investors are not receiving alerts they would find helpful.
Technology platforms led by Moonfare, (founded by an ex-KKR executive) and iCapital (partially owned by Blackrock) are arguably leading the race. Moonfare has multiple funds, open architecture, and already has €2 billion in AUM, though has a minimum threshold of €50,000.
My expectation is that the fintechs will consolidate their first mover advantage and over time, the larger wealth managers will realise that they need their own digital offer. Some will partner, like Fidelity, and other managers will build to get better control over the investment process and to capture a greater proportion of fees. Consolidation in the wealth management industry may also facilitate this as larger firms have more capital and support to innovate.
Do wealth managers need to have a private asset offer to keep up with market demand?
In the UK we expect adoption to be slow, though ultimately wealth managers will need a private asset offer to engage current and future clients and to prove their business model. Regulatory scrutiny is always going to be a concern for wealth managers, though 2023 has seen significant changes to investment in alternative assets.
A recent UK government consultation has been launched to introduce an exemption for performance-based fees from the charge cap calculations for schemes that choose to incur performance-based fees to encourage pension scheme trustees and to target alternative investments.
The FCA has also authorised Schroders Capital to launch the UK’s first long-term asset fund (LTAF), an open-ended investment vehicle designed to enable a broader range of investors to invest in illiquid and private assets, including defined-contribution pension schemes. In the EU, proposed changes to the European Long-Term Investment Fund (ELTIF) around fund of fund structures and the benefits of master-feeder structures are currently being debated.
It may be a case of chicken and egg. Innovation tends to attract capital, no more so than when technological innovation provides a solution to an investment need.
In the platform sector, Moonfare already has a good roster of backers: Vitruvian, Insight Partners, Bordier & Cie, and Fidelity International. In the broader wealth management industry, we have seen a lot of private equity money come into the sector – this has been the case in the UK (e.g. Nordic Capital, Warburg Pincus, Cinven); France (e.g. IK, Bridgepoint, Blackfin); the Nordics (e.g. TA, KKR, IK, ICG), and the trend continues across Europe.
Wealth managers are increasingly looking for opportunities for differentiated propositions – having a private assets offer would be one area to differentiate in a market that historically tends to not be an innovator or early adopter of new capabilities. Businesses with a private assets initiative should also attract more clients, have higher organic growth, and therefore a higher valuation – making it worth the investment. There is an opportunity for wealth managers with such an offer to provide this as a capability to other wealth managers and develop a platform-as-a-service proposition that generates incremental recurring revenues at a high margin.
By Christian Kent
Managing Director, Financial Services & Technology, Houlihan Lokey
May 16, 2023
