Private markets are booming, with assets growing at an annual rate of nearly 20% since 2017 and McKinsey reporting that these now stand at $11.7 trillion.1 Preqin predict these assets should reach $18.3 trillion by 2027.
Recent financial market dislocation is driving private banks, wealth managers, and institutional investors to look for opportunities in less correlated markets. They are showing greater interest in private market assets than in the past, driven by their low volatility, higher returns, and by the ability to customize investments.
These green shoots are evidenced with an increase in the number of democratized private markets product launches in Europe such as ELTIFs. The recently announced ELTIF 2.0 regime is expected to accelerate this growth with a broadening of eligible investments and a simplified distribution process.
In the UK, the recent launches of LTAFs, including the first of its kind by Schroders in March and another by the manager in May, creates a new opportunity for investors to achieve better outcomes by investing in private markets.
While the LTAF and ELTIF 2.0 aim to broaden the opportunity set for private investors seeking to participate in the higher returns associated with private markets that have a lower correlation with the short-term economic cycle, the relative illiquidity of private market investments and the inherent complexity in managing this asset class can be challenging.
It will require mastering a new ecosystem with a focus on three areas: liquidity management, distribution and technology.
Private investors may expect a democratized private market fund to behave like a public markets UCITS offering daily dealing. Simplification and investor education about access routes are key.
This is not typical for a private product with quarterly valuation points. While boundaries are being pushed with monthly trading private market funds, daily dealing can be tricky if not impossible to achieve with a largely illiquid portfolio of assets. For an asset manager, the liquidity management features for such products comes under intense scrutiny, both by internal risk teams as well as by regulators looking to ensure that managers do not erode value for the entire investor base in the fund on behalf of those who are trying to redeem.
This has required the addition of liquidity management features in products such as redemption restrictions or thresholds at dealing points, as well as diversifying the portfolio composition to include both public and private assets. These co-managed or hybrid strategies that cross over public and private markets can provide investors with liquidity when it is needed.
Regular assessment and the right tools to manage the liquidity features on an ongoing basis are critical.
The success of these products relies on mastering the distribution channels that were largely built for traditional straight through processing or online trading.
Accessing private market funds through these channels requires a shift by alternative managers, many of whom are accustomed to paper-based subscriptions from institutional investors and now must acquire the distribution skills of the so-called traditional fund management industry.
The right technology and automation tools that enable connectivity are a must for both managers and their service partners to be able to create a scalable operating model that supports a broader distribution of private markets products within the framework of the regulatory requirements. Ultimately this digitalization pivot will support ease of access for this growing investor base.
Democratization of private markets – how BBH can help
Through its private/public operating model, BBH can help alternatives managers explore portfolio mixes and the co-mingling of public and private assets in a single structure. We can support them by providing the following:
- Consultation on product design and distribution strategy to meet investor needs for democratized products such as ELTIF, LTAF, semi-liquid evergreen structures, multi-strategy funds
- Offering document review and alignment, data and operating model design, vehicle launch, investor onboarding and asset acquisition based on investor types, asset strategies, and domiciles
- Modelling and reporting tools to support liquidity management features such as redemption thresholds as seen in open-ended or semi-liquid structures
- Streamlined client service and operating model to support investor onboarding and servicing, fund accounting, NAV and financial reporting, tax support and depositary oversight
- Digital tools that provide transparency and oversight of the investor onboarding process and day to day fund administration workflows
- Optimized data distribution strategy to provide consistent and structure data that can be relied upon particularly for complex co-managed hybrid private-public fund structures
- Automation tools such as machine learning driven document reading capability and prospectus reading, automated cash reconciliation.
A version of this article previously appeared in Funds Europe online.