They specifically allow investors to access asset classes and strategies not available in the public domain, but also, and most importantly, they present unique characteristics, including risk-return profiles, that unlock the full potential of a private wealth portfolio.
Historically, private markets have strongly outperformed public markets and provided a source of greater wealth accumulation or a differentiated source of recurring income. In recent years the asset class has grown in popularity as it has started to transition beyond its long-term institutional client base to high net worth individuals, the fastest-growing segment.
This new phase of the transition, which is commonly referred to as the “democratisation of access”, is a huge leap forward for the wealth management industry as a whole. It makes a broad set of previously inaccessible, specialised strategies in Private Equity, Private Debt, Real Estate, Infrastructure and other Real Assets available to a wider public. We see the resulting significantly reduced minimum tickets, improved transparency in reporting, and lower fees as a strong incentive to invest.
But the biggest benefit from this democratisation comes for Private Wealth as it completes the final building block in portfolio construction. It effectively allows clients to harness a comprehensive asset allocation in private market sub-strategies to diversify portfolios, enhance their returns, lower their volatility and introduce inflation protection.
How investors allocate to private markets
The key tenet of private market investments is the long-term, buy-and-hold nature as capital commitments are usually for 10 years, with little option to divest before the full term.
After committing to a fund, investors usually meet capital calls over an investment period of 2-5 years and receive regular distributions until the depletion of the fund’s assets at maturity. As distributions come through, continuous reinvestments into new funds (vintages) allow investors to establish a permanent allocation to private markets.
Before considering an allocation to private markets, we believe in adopting a holistic framework to structure the entirety of a client’s assets into clusters and determine the way in which they intend to accumulate wealth.
Step 1: Identify liquidity and spending requirements
Step 2: Simplify the process by clustering the assets into three buckets: Immediate Wealth (Liquid Capital), Desired Wealth (Invested Capital, mid to long term) and Aspirational Wealth (Patient Capital, long term)
Step 3: Assets in excess of Immediate and Desired Wealth should be eligible for gradual allocation to illiquid private markets investments (Aspirational Wealth bucket) to capture the full wealth accumulation and diversification potential of the asset class.