The role of returns in private asset investing

Gareth Lewis

In our opening Delio Insights piece, we talked in detail about why demand for private assets is increasing and why wealth managers should care. One of the key points on the drivers is that it is more than just the financials - it is a desire to be engaged and inspired along with the changing demographic of investors. The financial aspects, however, cannot be ignored. In this article, we will look at this aspect in more detail.

The "hunt for yield" in an environment where traditional “safe” investments struggle to keep pace with inflation is well known. It is an unusual environment where an advisor can get excited about their bank releasing new cash products at 80bps, and 10yr gilt yields have fallen below 1% in the wake of Brexit. Shouts of “return free risk” are becoming even more prevalent.

Advisors have rightly managed expectations down, but investors in diversified mandates have still seen little to no return for some time now. This is combined with greater transparency of fees that has arisen across most jurisdictions in the wealth management industry. With most TERs coming in anywhere between 1.5 – 3% (even including robo-advisors) and taking a significant chunk of returns away, it is no wonder the industry is coming under increasing pressure.

In the face of this, the potential risk adjusted returns of alternative assets are increasingly common. The premium of private equity over public equities has long been quoted and wealth managers with the capability and scale to access private equity funds are doing so in ever increasing amounts to help clients diversify.

The charging structure in private funds is a deterrent, however. A fund has to be stellar before an advisor can look a client in the eye and tell them that the manager is going to take 20% of all profits on top of charging you 2% a year (not just on the amount they have invested, but often also the amount you have committed, regardless of whether or not this is ever actually deployed). This is in addition to being charged for the privilege of accessing them via an initial placement fee and further annual fees for advice or servicing even though once you are in you are in.

Notwithstanding that, the drivers of why private equity is a successful industry help unlock the wider factors of why direct investing is becoming more appealing to high net worth clients. The ability to back a team, to influence and advise them, to take a long term view and help be part of that journey are all key reasons why private equity outperforms public equity. It is these same drivers which are encouraging investor appetite for direct private equity far beyond just the financial implications of these factors.

It is not just about the financials that are driving this demand however. In the third part of of this piece we will talk through the personal, emotional and intellectual drivers which are encouraging the shift to direct private asset investments across all wealth segments.

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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.