Private banks, wealth managers and institutional investors are showing significantly greater interest in investing in private market assets than in the past, driven by their low volatility, transparency offered on investing platforms and by the ability to customize investments.
At the IMpower Fund Forum event in Monaco in May, delegates heard how investor interest in private assets has taken off, especially in the aftermath of the pandemic, as many investors realize how important it is to have a portion of their portfolio invested in something that is more stable and less subject to short-term volatility and with a long-term view.
A Cerulli research paper, titled European Alternative Investments 2022: An Alternative Future in the Making, revealed that investments in private assets have mushroomed from $3 trillion to $8 trillion in 10 years. In Europe there are just under $2 trillion of assets under management, up from $900bn in 2015. 90% are from institutional investors, and the next portion is from family offices and ultra-high net worth individuals.
With that scene set, a panel, aptly titled: “Let’s talk about the democratisation of private assets: New product platforms for private wealth” discussed how partnerships between private banks, wealth managers and their fund servicing providers can help address concerns around transparency, liquidity and how technology can enable further take up of private assets by private and individual investors.
Structuring and Launching Private Markets Products
Lata Vyas, Head of Alternatives Products at Brown Brothers Harriman in London, who helps firms in the structuring of democratized private markets products, shared these products are still perceived as complex and participants, whether a private bank or an asset manager seeking to launch a democratized product, need guidance working through the “kinks” or bridging the gaps in their understanding of what these products are.
“Private banks think with a distribution lens, and in terms of distributor connectivity, and platforms,” she explained. They’re predominately working with an investor base that’s used to the traditional UCITS style funds and therefore may expect the product to behave in a similarly liquid fashion. On the other side, the asset managers that private banks partner with to launch a democratized private market product are used to creating products for institutional investors.”
Education is key, the panel audience heard, and private investors require help in understanding the lack of liquidity in some private assets. Greater transparency into underlying investments—both in terms of pipeline and reporting—continues to be a focus area for managers looking to attract the private investor base. However, it is important to strike the right balance when reporting to private and individual investors. Vyas noted that while a 30-40 page portfolio report is typical for private market products that are set up for institutional investors, it is not always easy for a private client or individual investor to digest such an exhaustive document.
For a manager or private bank launching their first democratized private market product, the best approach, she said, is “early engagement with your service partners” to work through the operational nuances of the fund and ensure success when a new fund is launched. This early engagement can help ensure a viable product that meets investor requirements is available on day one.
Evolving Prvate Markets Products
The audience heard there has been significant product innovation and operational developments in private markets to enable investors to access them.
Illustrating the changes, Vyas pointed to new routes to market available to investors via open-ended fund and closed-ended fund structures. The open-ended semi liquid structures give investors access to a little bit more flexibility so it takes away some of the capital access concerns, while liquidity management mechanisms can be introduced to the fund allowing managers greater control over the level of permitted redemptions.
On the other hand, while closed-ended fund structures are closer to what institutional investors use to access private markets, this is much more about a long-term commitment. For private investors looking for long-term investment objectives, there are vehicles available such as the European Long-Term Investment Fund (ELTIF) and more recently, the Long-Term Asset Fund (LTAF) in the U.K.
Vyas said she has been working closely with managers in the design and launch of these new products. Another growing trend in the European market, Vyas observed, is the use of platforms for private market investments. “What I mean by that is, for example, a Luxembourg Part II UCI fund, which has the ability to have multiple sub-funds underneath,” she said. “The benefit of that is you have the operational scale of a platform, with the flexibility to apply different strategies and capital access methods individually at the sub-fund level. It could be an open-ended sub-fund, a close-ended sub-fund, an ELTIF, non-ELTIF etc.” Asset managers are taking this approach because it provides the ability to offer a wider range of products while managing administration cost pressures.
Enhancing Technology and Visibility
The ability to offer an enhanced level of visibility is key, especially when launching products via diversified platforms. While investors are attracted to these products as it gives them the product range across the private market spectrum, transparency and visibility into the underlying portfolio are key for the investor. In this vein, technology that can support multi strategy private markets funds is important and finding a service partner who can simplify such reporting can go a long way.
Often distributors that are selling these products to their investors rely on Straight-Through Processing (STP) trade instruction methods such as SWIFT, noted Vyas. But she said as the more open ended or semi-liquid products include liquidity management features, such as redemptions limits and subscription queues, the STP instructions are no longer useful because most of the STP-enabled platforms today are unable to cope with features such as gating. “I think that’s where the shift in the technology landscape needs to happen if these products are really going to be available for mass distribution,” she said.
In summary, the audience heard that while it is impossible to time the private assets market, a long-term consistent approach to investment is key to a successful result. Even in down parts of the business cycle, it’s important to invest through it with a long-term objective. But most of all, it’s about early engagement with service partners to ensure investors are appropriately educated about private assets to enable their further take up — education is democratization.
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