Laying the pipelines connecting wealth managers to private markets

Private markets were, until recently, the preserve of institutional investors. When the wealth industry was occasionally involved, access would be offered by the largest private banks to those at the summit of the wealth pyramid.

But things are changing. The asset class is opening up to a wider range of wealthy investors through lower minimum stakes, “evergreen funds” — perpetual vehicles with an indefinite lifespan rather than a fixed term, offering greater liquidity than traditional closed-end funds — and increased use of technology.

With this “democratisation” of private markets now well under way, the industry’s biggest challenge is no longer how to get these products into investment portfolios.

The new problem which investment firms are grappling with is how to ensure advisers and clients understand what they are buying.

These concerns have been brought into sharper focus by mass redemption requests in semi-liquid private credit funds, along with growing scrutiny about how private asset products are distributed to the wealth market.

Vertical alignment

The demand for expansion of alternatives into wealth channels was almost a unique occurrence, believes Tom Slocock, head of international product development and origination at iCapital, a global fintech platform that makes private equity, hedge funds and private credit products accessible to wealth advisers and high-net-worth investors.

“We have vertical alignment here, where everyone seems to be pointing in the same direction,” he explains. “Investors are keen to access exposure to the huge percentage of the global economy which is in private hands and not publicly listed.”

Wealth managers and banks are working hard to provide this, he says, to service those clients and enable them to build broader portfolios.

“Asset managers are keen to identify and raise capital from a new channel, and bring their investment expertise to new investors. Even the regulators and legislators are onboard.”

iCapital sits between the asset managers (the “manufacturers” of the products) and the wealth managers (the “distributors”) of those products. The firm does not directly serve individual clients and Slocock describes it as “an enabler, not a disrupter”, between the two groups, with respect to the flow of capital.

Reducing friction is key, he says. “If you wind the clock back to the process of investing in a private market fund in the 1990s, it was extremely difficult and painful for an individual investor, because they were effectively being treated the same way as an institution.”

He recalls the lengthy onboarding processes, long subscription documents, capital calls and other administrative work, which were complex for both advisers and clients, and were difficult to negotiate at scale.

One of the issues in today’s fast-evolving landscape is that the infrastructure now required of private banks and wealth managers is “prohibitively expensive for all but the biggest players”, says Tom Douie, London-based founding partner and chief executive officer at PM Alpha.

The company was initially set up to provide these services to those wealth managers further down the chain, but he described approaching these firms as “like finding needles in a haystack”.

“You’re convincing people to do something they don’t know how to, let alone that you’re the right people to do it for them,” he says. “So it’s kind of a double sale.”

Instead, realising the infrastructure they had developed could point both ways, PM Alpha began targeting asset managers, focusing on larger firms. Digitalisation of the workflow became essential.

“This could have been done 10 to 15 years ago with the tech that was available,” says Douie. “But it would have been much more capital intensive, because what we save in tech now — and AI is a part of that — would have been simply more bodies on the ground. You could argue this might have provided too high a barrier to entry.”

Expanded access

The growth in the private markets to wealth pipeline has been considerable, says William Barrett, managing partner at Reach Capital, an advisory firm specialising in alternatives.

“Three or four years ago a number of general partners started knocking on our door saying, ‘we’re really interested in the wealth angle to diversify our limited partner base — why don’t you start exploring that and do the same job as you do for the institutional side?’”

At first, it was only the biggest players in the private markets space that had offerings for wealth, he explains, but that has expanded to the top 100 managers. And it is the same on the private bank side.

“To start with, a couple of banks were involved in private markets. Now, I would say that all of them are; they must have a private market product, even if it’s a simple feeder fund into a big platform. I don’t know of any private bank or any proper wealth manager that doesn’t have an offering.”

Many private banks first dipped their toes into these waters because clients were trying to gain access to specific, non-listed companies, reports Barrett.

But just because clients want in does not mean the asset class will work for everyone, which makes education vital, he says.

“One challenge is who is advising the end investors. Is the private bank advising them? Is an independent adviser advising them? And what is their knowledge of private markets? Because it’s new to them too. When we do distribution, I’m not sure if we’re doing distribution or education.”

Making sure clients get access to suitable vehicles comes at the product design phase, says Barrett. For example, a product that would be purely “primary” in nature is probably not the best fit for the wealth market, where there needs to be more visibility on liquidity.

“You cannot replicate the same product that you used to sell to the institutional side to the wealth market,” he states emphatically. “It doesn’t work that way. You need to make sure that whatever goes out is a good fit in terms of risk-return and liquidity.”

Once the correct products are in place, wealth managers must explain the product to end investors correctly, making sure it is understood by all parties, he adds.

Learning curve

People all along the pipeline are now realising the critical importance of education, agrees Slocock at iCapital. “How do you deliver that? How do you scale that? And how do you ensure it really gets through, and that people are making the right decisions all the way through the distribution chain and, critically, the investor.”

When wealth investors start looking for large potential redemptions, as has been the case in private credit markets recently, then it is possible a mismatch has taken place. 

This can be “a mismatch of understanding, a mismatch of desired access to liquidity versus the reality of the investment product that people hold,” he says. “I think that’s something the overall industry needs to ensure is properly understood.”

The situation in private credit now is by no means the first one of these mismatches, he explains, pointing to real estate funds in the UK as an example. “You have these open-ended vehicles that allow some liquidity, but that liquidity has to be capped because the underlying assets are not daily traded and they’re not designed to be,” he adds.

It is essential the end investors know what they are getting into, he says, emphasising his dislike of the term “semi-liquid”.

“These are illiquid funds with some liquidity features,” he says. “We call them evergreens or open-ended.”

Future growth

As the wealth industry’s adoption of private markets continues to mature, the question remains: just how far into the investor base will the asset class go?

“People talk about a wealth pyramid and what you’ve seen over the past few years is quite a dramatic focus of private markets moving down that pyramid,” says Slocock.

But just how far down that pyramid can you find suitable investors for private markets? Each time an asset manager delves into a new market, they need to understand what that market is looking for. In addition, they must identify which vehicle makes the most sense, says Slocock. Additionally, it has to be delivered in a way that is appropriate and suitable for each investor type.

There is no doubt the opportunities are huge for all involved. “I think we’re really just at the beginning of this trend,” says Barrett at Reach Capital, explaining that volumes actually raised on the wealth side are, so far, still small compared to the opportunity.

“If you look at the size of the wealth market, if the entire industry were to have a 5 to 10 per cent allocation to alternatives, well the opportunity is huge,” he believes. “Look at France for example, where right now, you have less than 1 per cent of wealth portfolios in private markets. So, do you have room for growth? Yes, a tonne.”