Allocations to private markets now commonplace for private banks

Private banks have been promoting private markets to their clients, but potential investors must be made aware of the liquidity constraints.

Private markets have traditionally been the preserve of institutional investors. But in recent years private banks have been promoting them to high net worth individuals (HNWIs) and wealthy families as a diversification play.

There has been a flurry of activity in this space. Morgan Stanley Wealth Management opened a private markets transaction desk for private company shares in the secondary market in March 2024. And, in June, BlackRock acquired London data provider Preqin to boost its private markets capability.

Janus Henderson Group then announced in August that it was to buy private credit firm Victory Park Capital Advisors. PGIM, the global asset management business of Prudential Financial, meanwhile, has announced it wants to boost its private market assets by more than 50 per cent to $500bn in the next five years.

Indeed it seems that allocating to private markets is now commonplace. Bain and Co expects private market assets under management (AuM) to reach as high as $65tn by 2032 and account for 30 per cent of all AuM by then. Fee revenue for such investments is poised to double to $2tn over a decade, according to the consulting firm.

Know what you are getting into

But private markets are not for the fainthearted. They are intrinsically illiquid and lack visibility. That can be dangerous; liquidity issues encountered by the hedge funds sector in the 2008-2009 financial crisis almost led to the collapse of Swiss banks, including Bank Syz and UBP and to serious problems at UBS and others.

“We are seeing strong client interest, mainly driven by a potentially unlimited upside and variety of investment opportunities," says Oyvin Furustol, senior private markets expert at LGT Private Banking and Asset Management.

The firm offers closed-ended funds with an investment length of between 10 and 12 years and also evergreen funds that are semi-liquid too. Redemptions can be made up until the fund reaches a set percentage of its net asset value in outflows, at which point the fund becomes closed again.

“It’s important to remember that the underlying assets in both cases are essentially illiquid and for that reason, we would advise an asset allocation of 20 per cent,” says Mr Furustol.

Illiquidity premium

Liquidity is one reason why private markets have been limited to institutional markets with long investment horizons. Some investors actually like this. “The illiquidity of private markets and alternative assets comes with an 'illiquidity premium' and many see higher risk-adjusted returns as a significant benefit of investing in private markets. But it needs to be managed carefully,” says Hugo King-Oakley, head of private markets and community at Global Partnership Family Offices.

Charlotte Thorne, founding partner at Capital Generation Partners (CapGen) points out that illiquidity is just one factor that has made private markets largely the preserve of institutional investors.

“Unlike public markets, where, by definition, the public can engage, private markets depend on networks. A private transaction is a high-stakes operation and all of those involved prefer to have reliable and pre-vetted counterparties and that tends to mean a smaller group of known parties,” she says.

Still suitable?

But do the liquidity and networking issues mean that private markets cannot be suitable for the private banking and wealth management world?

The answer lies somewhere in the middle.

The market has grown; companies are staying private longer and want inward investment. That means more opportunities to invest and new ways to package and market such opportunities. Fund promoters need to find investors and that means they are looking to extend the client base, hence the interest in HNW families and individuals.

“In many ways that is no bad thing," says Ms Thorne. “Opening up a previously hard-to-access asset class to a new client base brings new capital to the sector. And the fees institutions can charge on private capital are also attractive.”

Indeed, greater levels of interest mean that valuations start to go up. “That can be risky if interest wanes and investors are left with an allocation to private markets that they cannot sell out of," says a spokesperson from a major UK private bank. “Another issue is that, if investors are seeking high yields as a diversification play, the temptation could be to over-allocate, again that is an issue if they cannot sell out,” adds the spokesperson.

Investors do need to be aware that by their very nature, private markets provide almost no liquidity, and that visibility as regards returns is very limited until the fund is at the end of its life. This is as important for investors to know as the diversification play and potential for high yields.

“Marketing private markets as a very long-term investment stops investors bolting for the door when volatility spikes and times look challenging," says CapGen's Ms Thorne. But being locked in without any visibility as to your potential outcome will not suit everyone, she adds.

“If carefully selected, pooled vehicles can help investors get access to otherwise inaccessible funds. And the best performers can provide a powerful fillip to a portfolio. But this asset class is only suitable for some investors [who can deal with illiquidity and lack of visibility],” she concludes.