Ambition must meet discipline for private markets investors
Stephen Atkinson
Private markets are having a moment.
High net worth (HNW) and ultra-high net worth (UHNW) individuals are putting more of their wealth into alternative assets than ever before and, on paper, the attraction and drivers behind this growth in demand are obvious.
MSCI Private Capital Solutions data shows private equity has delivered average annual returns of 13 per cent over the past 25 years, outperforming public equities, which returned 8 per cent according to the Russell 3000 index.
This potential for outsized performance, paired with access to a pool of companies you simply can’t buy on the stock exchange, is hard to resist. In the US, 87 per cent of firms generating more than $100m in revenue are privately owned.
Lustre is added by the perception that private markets offer lower volatility for HNW investors than equity and bond markets which is a key consideration in today’s uncertain environment.
But behind the headlines, hidden challenges are lurking. Private markets can offer many benefits, but HNW investors and their advisers need to be prepared for the operational complexities that come as part of the package.
Flow data shows private equity remains the most attractive alternative asset class for HNW portfolios. According to the Campden Wealth Family Office Report 2024, it represents the largest single alternative allocation. However, private credit is gaining ground, particularly in jurisdictions with higher interest rates. Inflows into the asset class have doubled over the past two years, reflecting a broader search for yield.
Private markets can offer many benefits, but HNW investors and their advisers need to be prepared for the operational complexities that come as part of the package
Infrastructure funds are beginning to build momentum as an asset class for investors and while there’s a fringe of adventurous money flowing into digital assets or venture capital funds targeting blockchain or crypto plays, that’s still a niche for only the most risk tolerant.
Geographically, Europe is increasingly stepping up its game in private markets. Regulators in several jurisdictions are now accommodating fund structures designed to broaden access and attract global managers. Luxembourg’s RAIF structure, for example, is gaining traction as a flexible vehicle for private equity.
Sizzle and substance
But if the potential returns are the sizzle, the operational reality is the substance — and not every HNW investor is well-prepared to manage it.
Because these assets are not publicly listed, they require specialist custody and administration alongside a depth of operational, tax and regulatory knowledge. This means the paperwork can be extremely testing with application forms for private equity funds running into the hundreds of pages.
Asset valuations are another challenge and often lag by months during which time capital calls or distributions may need to be accounted for
Once signed, the HNW individual is committed to a specific amount — whether that’s $1m, $10m or more — and must be ready to meet capital calls as they arise which typically drop during the first five years.
Missing a capital call can have serious consequences, including a potential liability to the fund and to other investors, which is why having a robust process in place is essential.
Asset valuations are another challenge and often lag by months during which time capital calls or distributions may need to be accounted for.
In response to some of these challenges, there has been an increase in major private equity firms launching ‘evergreen’ funds with the promise of greater flexibility and liquidity.
Not only does this bring an obvious trade-off in terms of returns, but investors will still need to carefully manage any exit to ensure the transaction is properly monitored and managed.
Opening doors
Private markets aren’t going away. In fact, they’re expected to grow by more than 60 per cent by 2030 with HNW investors a major driver of this expansion. As regulators open doors and investor appetite grows, more capital will flood in.
Private markets are expected to grow by more than 60 per cent by 2030 with HNW investors a major driver of this expansion
The winners in this next phase will be the investors and advisers who recognise the importance of managing an entire ecosystem of commitments, compliance and cashflows when entering and allocating to private markets.
If this is done right, they can unlock access, diversification and potentially superior returns through this burgeoning sector. Done badly, they can be expensive, illiquid headaches.
In private markets, ambition must meet discipline with a sophisticated approach all about efficient management of holding positions.
Stephen Atkinson, global head of sales, Utmost Wealth Solutions
