Beyond the financials - What is driving demand for private assets?

David Newman

One of the key themes that resonates through many conversations we have had is that private assets need to be framed better in the context of risk. This is a crucial point on many levels. As investors increasingly allocate to private assets the need for advice is never more.

That is why in the third part of Delio Insights we touch on why wealth managers should care. In the final part of this series we will look at that topic in more detail, but for now we want to look beyond the financial drivers. We believe that in this space the efficient frontier of investments has shifted to risk adjusted returns vs. passion. But more than that the risk vs. return trade-off is different for every investor in direct investments; the increased ability to engage and help shape an outcome is also a key driver. 

This desire to engage with the company and an individual’s belief in their ability to make a difference, forms part of a wider conversation regarding the changing demographic and mind-set of today’s wealth management clients. It is a changing demographic who believe in being more hands on and more involved in their investments. This is the case regardless of whether investing in public markets or private markets, but the private markets afford them more opportunity to do so. They can look management in the whites of the eyes; they can visit their factories, understand their businesses and share insights.

It is not just about a new generation of millennials with a distrust of Wall Street but a key factor driving this changing mind-set amongst the HNW population is the source of their wealth. The entrepreneur is the single most important client group in most wealth management markets today. These clients are more likely to want to invest in sectors they know and want to share their experiences. This combines with their intellectual desires. As the exits happen at an earlier and earlier age and life expectancy and health increases, clients want to do more. Few clients want to go from 7 days a week to none and those that do find themselves getting bored very quickly.

The demand to satisfy their intellectual curiosity is clear. Some go apply themselves to charities, learn a language or lower a handicap. Increasingly though, many start a second, third and fourth business, apply their experience to help others or become more active in their investments. When doing so they want to buy in to a story as much as the potential financial return, they invest where they can be inspired and engaged.

This emotional appeal, intellectual curiosity and hands on approach means the efficiency frontier is no longer just about risk vs. return, it is risk adjusted return vs. passion. The right investment, private or not, is not just what delivers the best return but satisfies the clients the most emotionally. The growing trend toward behavioural finance has started to take account of this when constructing portfolios but the same is also true in private investing (and even more so in impact investing which we will discuss in more detail in later articles). The right direct investment is not just the one which has the best financial prospects but the one in which the investor gains the most enjoyment from.

Combining these emotional and intellectual factors with a changing demographic and mind-set in a low return environment makes it clear to see why the demand for private asset investing is increasing. What we will delve more in to in future articles will be where and how these investors are deploying their capital, the origination and decision making process and also how these areas vary across wealth segments and geographies as this trend is not just at the ultra high net worth and family office level.

In the next part of this blog series however, we will look in more detail at why wealth managers need to pay attention to this trend.

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Articles will delve more in to such topics as what the wealth management industry is currently doing and where it is going, what private assets the UHNW and family office population are investing in and how they are making their decisions.

To find out more about how we are helping organisations to build direct private asset propositions that enhance their offering, please get in touch via our website or email to arrange an initial conversation.