Fundraising slowdown triggers dash for private wealth cash

April 10, 2024 (Preqin News) – GPs looking to raise capital from the private wealth segment should act fast or risk missing out on the opportunity.

Larger private capital fund managers have been actively targeting the private wealth segment for the past decade, but efforts across the industry have intensified in recent years, in part because institutional LPs were either capital-constrained or at allocation limits.

Hugh MacArthur, Chairman of the Private Equity Practice at consultancy Bain & Company, is surprised by the speed at which the relationship between private capital and private wealth has developed and grown. ‘The opportunity to crack private wealth is coming very fast. If you’d asked me about this three years ago, I’d have said maybe in 10 years. But it’s happening right now,’ he told Preqin News.

The number of evergreen or open-ended funds has doubled in the past five years as asset managers develop new products tailored to wealthy and high net worth (HNW) customers. Preqin now tracks 520 evergreen funds, with a combined net asset value of more than $350bn (the actual number is higher as 18% of evergreen funds, predominantly ELTIFs and LTAFs, do not disclose valuations).

While some managers have the scale and capacity to develop and market products directly, MacArthur says that most GPs will need to target the intermediary community.

‘If you’re a mid-sized private equity firm, the most cost-effective approach is often to go to the wealth managers and RIAs and get on their platforms. These folks are filling their pipelines and, once they’ve got their portfolio of GP relationships, you’re going to have to knock somebody out to get on. There’s still a lot of white space, so now’s the time to get on the road,’ he said.

There is demand for the full range of private capital strategies. For example, advisors to wealthy investors in France will prioritize private debt, secondaries, and infrastructure in 2024, according to a survey of distributors there by placement agent Reach Capital, mirroring the current preferences of institutional investors.

Nearly two-thirds (64%) of wealth management advisors said they would prioritize private debt, with secondaries (54%) and infrastructure (48%) next. Of private equity strategies, mid-cap LBOs were the most popular (39%), followed by growth (30%), small-cap LBO (26%), large-cap LBO (23%), and VC (8.5%). Just under a quarter (24%) were interested in impact strategies.

‘We were a bit surprised that wealth management advisors were asking for the same strategies that institutions are asking for – private debt, infrastructure, secondaries,’ William Barrett, Managing Partner at Reach Capital told Preqin News. ‘It feels like they have a pretty good understanding of the cycle and that they’re entering into products that are made for institutional investors. They’re pretty much asking for the same thing for the same reasons.’

The survey results indicate that advisors to wealthy investors have their fingers on the pulse of private markets. Private debt managers have benefited from higher interest rates and reduced appetite for corporate lending, particularly for smaller and mid-cap companies, at banks. The latest round of results from listed alternative asset managers showed almost all private debt strategies and markets had delivered double-digit returns in 2023.

‘We have been experiencing what’s been, in our opinion, one of the most attractive market environments we’ve seen for senior direct lending in the past two decades,’ Barry Fricke, Head of EMEA Alternatives Distribution for Wealth at Goldman Sachs Asset Management, told Preqin News. ‘Higher base rates and wider spreads have contributed to very attractive all-in yields. Individual investors are often drawn to the asset class by the prospect of higher yields than what is typically available in public credit of a similar quality.’

However, the Reach survey also revealed some differences in the motivations behind the private wealth segment’s desire for increased exposure to alternatives, particularly the opportunity to invest in the real economy, which was cited by 72% of distributors surveyed. Diversification (70%) and outperformance (54%), which are the two factors most cited by institutional LPs in Preqin surveys, were the next most common reasons cited. Alignment of interest was listed as strength much less often (33%), as was low volatility (28%).

Rashmi Madan, Head of EMEA at Blackstone Private Wealth Solutions, told Preqin News that access to a broader range of equity opportunities was a crucial factor for many of its private wealth investors, who now account for a quarter of the firm’s $1tn AUM: ‘Individuals are only able to access a small percentage of the investable universe through public equities. Some 86% of companies globally with revenues over $250mn are privately held, so the opportunity set and types of strategies available within private markets are diverse and attractive.’

Illiquidity and capital risk topped the lists of weaknesses in the Reach survey, cited by 77% and 53% of respondents respectively, more than the long investment horizon (41%), opacity (36%) and J-curve (31%).

‘For individual investors, adding private markets to their portfolio can be a game-changer,’ said Madan. ‘But any program of change requires understanding and education. Investing in private markets can differ in a number of ways from investing in public markets, so there’s a need to educate potential investors on the asset classes, how they fit into a portfolio, fund liquidity, and different return profiles.’

Blackstone offers ‘essentials’ briefings on private markets, private equity, private credit, and real estate, as well as explainers of how private market allocations impact a portfolio, particularly when compared to a traditional 60/40 mix, and on-demand learning.

Data provider Preqin is expanding its educational suite, building from its established Alternatives 101 for beginners to add training for businesses and bespoke programs. Nicole Lee, Head of Content at Preqin, said: ‘Most institutional investors get the case for an allocation to private markets. They understand the risks, the rewards, and how they fit with their more traditional allocations. But for individuals and new entrants, the needs vary hugely, from a basic explanation of what types of real estate assets funds to invest in, to understanding the dynamics of capital calls and cash flows.’

Global fintech platform iCapital, which was developed to make the alternative asset investment process more efficient for institutions, has invested heavily in a suite of education, compliance, and analytics tools, most recently with the acquisition of Mirador earlier this month, designed specifically for wealth managers and their clients.

‘The reason we’re so focused on education is because we want people to make the most informed decisions when it comes to this asset class,‘ Dan Vene, Co-Founder and Head of Investment Solutions at iCapital, told Preqin News. ‘Private markets have the ability to generate alpha and enhanced return profiles, but advisors and clients need to fully understand the liquidity profile and correlation of each new investment in order to make the best possible decision.’

Vene says that not only do potential investors need education about alternative assets, but they also need ongoing monitoring and analytics that illustrate the impact of adding particular funds or investments: ‘As private investors move along the sophistication scale, they need to focus on correlation and factors across both traditional and alternative investment exposures and how selecting a particular alternative investment will impact their overall portfolio.’

There are concerns that in the rush to secure capital, some fund managers may oversell their offerings. ‘For me, the risk is that GPs come in with aggressive pitches that lead to disappointment. Private markets are not risk-free – there is no magic asset class,’ Paul-Edouard Falck, Head of Private Wealth Solutions at Reach Capital, told Preqin News. ‘The wealth managers are professional and well educated, but the final investors are not. It is important that we explain the asset class well to the wealth manager and also to their clients.’

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}