A Desire To Engage
The desire to engage with private companies and an individual’s belief in their ability to make a difference forms a key part of an evolution in investment behaviour, which is supported by changing investor demographics and mind-set. New Ultra-High Net Worth investors believe in being more hands-on and more involved in their investments. This is the case regardless of whether they invest in public markets or private markets although the private markets afford them more opportunities to do so. They can speak directly to management; they can visit their premises, understand and contribute to their businesses and share empathy and insight.
Changing Mindset of Wealth Management Clients
It is not just about a new generation of investors that is sceptical about public markets, rather a key factor driving this changing mentality is the source of wealth of this investor base. Entrepreneurs are a key client group in most wealth management markets today. They are more likely to want to invest in sectors they understand and feel they can contribute to. This combines with intellectual desires. This compliments another change within investment markets – entrepreneurs are realising liquidity from their businesses via exit events at an earlier stage and they want to continue to participate and contribute via their investment portfolios and personal interests. Few entrepreneurs want to go from an intense, 7 day a week environment to nothing and the demand to satisfy this energy and enthusiasm is clear. Increasingly entrepreneurs many start a second, third and fourth business, applying their experience to help others or become more active in their investments. When doing so they want to buy into a story as much as the potential financial return and they invest where they can be inspired and engaged.
The Emotional Appeal
This emotional appeal, intellectual curiosity and hands-on approach means the efficient frontier is no longer just about risk vs. return, it is risk-adjusted return versus passion. The right investment is not just what delivers the best return but emotionally appeals to an investor. The growing trend toward behavioural finance has started to take this into account when constructing portfolios but the same is also true in private investing (particularly so in impact investing which we discussed in more detail in January’s insight article).
Combining these emotional and intellectual factors with a changing demographic and a changing mindset within a low return environment, it is clear to see why the demand for private asset investing is increasing.
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