More advisors are considering illiquid investments like private equity funds for the enhanced return potential, but a number of perceived obstacles still stop many advisors from taking action.
iCapital Network surveyed nearly 450 registered investment advisors about their views on and experience with private equity. One of the most interesting findings to emerge from the research points to a disconnect between advisors and their clients when it comes to private equity: Approximately two-thirds of RIAs believe their affluent clients are interested in private equity, but just one-quarter of advisors have proactively broached the topic with clients and only one-in-five advisors currently include the asset class in their wealth management offering.
This state of affairs may indicate a degree of unmet demand among wealthy investors for these types of investment opportunities.
In the same study, RIAs identified nine issues that they say hamper the use of private equityfunds in their advisory practice (Figure 1). The issues fall into two broad areas – those that relate to the structure and characteristics of private equity and those that relate to the advisors’ own knowledge and familiarity with private equity. Learning how to best navigate these obstacles may provide an opportunity for advisors to expand their capabilities in ways that align more closely with client preferences and inclinations.
First, some context. Until recently, private equity firms have primarily targeted institutional investors. The most established managers have long-standing relationships with pension funds, insurance companies, foundations, endowments and investment consultants and many times allocations from the highest-demand managers are virtually reserved before their next fund is even open for investment. If advisors and their clients are somehow able to get access, in many cases the investment minimums start at $5 million (but can be as high as $20 million) making it challenging for all but the wealthiest individuals to get diversified exposure to the asset class.
At the same time, private funds are not required to publicly disclose their performance and there are no mandatory standards for reporting. So, prospective investors and their advisors may have difficulty knowing when an opportunity is available for investment and then assessing that opportunity against other similar opportunities and their specific investment goals.
Many of the nine issues cited by advisors are a reflection of the historical landscape. However, the advent of new technologies and greater access to high quality information about investing opportunities are providing workable solutions to many of the long-time obstacles and helping to make private equity accessible to a broader universe of investors.
Lowering the Barriers to Entry
In recent years, several online alternative investment platforms have emerged to address the historical issues associated with the asset class and provide an interface between fund managers and a new frontier of individual investor capital.
The platforms aggregate smaller purchases into a single vehicle that can meet the minimums at each fund, helping to democratize the asset class with entry points as low as $100,000. The collective ‘purchasing power’ is used to negotiate with managers to secure allocations into desirable offerings.
Many platforms add new investments continuously, allowing individual investors and their advisors to review new opportunities online, conduct analysis and due diligence on materials supplied by the managers as well as objective third-parties, complete all stages of documentation and track their investments – a digital experience designed for the way people consume information and execute transactions now.
Lastly, many of these platforms are also integrated with the industry’s major custodians helping to simplify transactions in and reporting on private investments for advisory professionals and organizations with established operational processes.
Increased Need for Advisor Education
Despite being around for decades, alternative investments (and, more specifically, private equity investments) are still not considered mainstream. As such, many advisors have much to learn before they can confidently raise the topic with their qualified clients.
In particular, advisors should understand how these types of investments work, the primary ways in which they differ from publicly-traded investments, where they fit in a portfolio, how they should be evaluated relative to their peer universe and other asset classes, and other critical risks and elements so they can appropriately set client expectations.
A significant number of educational materials — including academic studies, whitepapers, short reports, videos and webcasts, presentations and training modules — are available from reputable investment and specialty organizations, many of which are free and may offer continuing education credits for professional designations.
Many of the online alternative investment platforms are also able to offer institutional-quality research and exclusive video feeds of fund managers explaining their strategies, track records, deal sourcing, competitive landscape and case studies. Such materials can help advisors climb the learning curve on private investments and increase their familiarity and facility with these offerings.
If a client cannot tolerate illiquidity or is not in a position at a particular time to lock up some portion of their capital in these strategies, private equity is not going to be appropriate for them. However, client demand notwithstanding, advisors should also be aware that private equity may offer numerous benefits to a high-net-worth portfolio, including the potential for greater diversification and outperformance, which can help minimize the effects of sustained market volatility and low interest rates.
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