Over the last few years, clients have shown a greater appetite for investing in the private markets. That has prompted firms to spend time and money beefing up their capabilities in this area or risk falling behind competitors that do.
Because no two firms in this industry are the same, some will be better positioned than others to provide high-quality private market access to clients. The truth is it’s likely that a $100 million RIA will have a narrower suite of solutions than firms with billions in AUM, including family offices that must have unique offerings to satisfy their sophisticated roster of clients.
Indeed, size, experience and expertise can make all the difference in this space. Therefore, advisors and RIA leaders considering private market investments should fully understand the types of access they can provide, the institutional platforms available and the potential advantages of partnering with established players.
Types Of Access
To determine what kind of private market access you can provide, objectively assess your firm’s investment capabilities, know-how and operational resources.
Take a practice whose portfolio management services consist of buy-and-hold strategies with publicly traded funds or individual securities. A business like this may have a lot to learn about private markets.
It could be simple things like appreciating the fundamental difference between having a private equity stake in a company and accessing private credit funds set up to serve businesses that struggle to access loans elsewhere.
Or it could be a more esoteric issue. For instance, many fail to understand how limited partner-led and general partner-led secondaries diverge. The former occurs when an investor sells a stake in a fund to another investor, whereas the latter involves an asset or a company in one vehicle being sold to another.
Also, what do you know about co-investing alongside PE funds? On the surface, it’s a great approach to create a family-office-type experience for a client or group of them, but there are some downsides to know about.
Beyond access, providing these offerings requires something else: specialized skill sets, the proper talent and disciplined processes.
All this is just the tip of the iceberg, underscoring that, beyond access, providing these offerings requires something else: specialized skill sets, the proper talent and disciplined processes.
Institutional Platforms
Thankfully, firms now have greater access to institutional-level investment management platforms that support alternative products. Plus, advancements in technology have made it easier for platforms to conduct due diligence, which helps to screen overly risky private market funds and pool investor assets to access funds that otherwise would be out of reach for mass affluent clients.
What’s perhaps most noteworthy, however, is that minimum asset thresholds for these platforms have also fallen sharply in recent years. At one time, a client needed a minimum investment of $5 million for some alts. Now, $250,000 is typically enough, while $100,000 sometimes does the trick.
Yet even as the minimums have come down, a gap in customization may exist. After all, a client allocating $100,000 can expect fewer bespoke options and possibly even inferior service from institutional-level investment management platforms compared to someone who invests 50 times that.
In addition, the private market requires educating clients and colleagues on the benefits and risks of various alternative products. Investment management platforms often provide such resources, which can be helpful starting points for advisors and their firms. However, doing your research and tailoring the message for your audience while presenting accurate information is important.
Another caveat is that the platforms themselves still need to be vetted beforehand. If problems arise with private market funds, clients and regulators are unlikely to accept any excuse that the investment management platform vouched for the product.
Advantageous Partnerships
Instead of attempting to handle all this alone, advisors and RIA leaders should consider partnering with a wealth management firm with a proven track record. It’s far more straightforward – and potentially much more profitable – to have a partner with experience and expertise in this area than to wade into an unknown, complex part of the market.
In addition, certain firms can use their influence to negotiate better deal terms with leading private market players. That benefits advisors, who can avoid passing on costly fees to their clients.
Over the long term, the partnership approach presents advisors with the opportunity to develop more robust capabilities by learning from experts and leveraging their resources. Within a few years, if current trends continue, being able to offer private market access may become table stakes for firms and advisors.
Within a few years, being able to offer private market access may become table stakes for firms and advisors.
Meanwhile, RIAs with strong private market capabilities may be able to use them to enhance their M&A prospects – either by attracting sellers of smaller shops in need of private market access or by selling their firm to an acquirer ready to add complementary services to its own private market offering.
Mark Biegel is a Managing Director, Wealth Management at Choreo.
