Private Markets: Establishing a New Paradigm in Wealth Management

Private markets adoption is accelerating across the wealth management industry and efforts to implement private assets for HNW and UHNW investors are increasing every day. However, investing in private assets is not as straightforward as in the public markets. In fact, the disparate and fragmented environment in private markets today resembles that of the public markets of yesteryear. Successful implementation of private assets in wealth management requires education and a strategic, considered approach.

In this article, John Palmer, Vice President of Private Markets Wealth Strategy, discusses considerations for wealth managers, from understanding the industry landscape to manager selection through the technology needed to manage and deliver these portfolios.

Interest in the private markets has surged across the wealth industry

Wealth managers and advisors see this as an opportunity to meet client demand, seek differentiation, and grow market share. Investors, in the face of increasingly correlated public markets and disappearing sources of return, are seeking greater portfolio diversification and potential outperformance.

The demand for private assets among high net worth (HNW) and ultra-high net worth (UHNW) investors has spawned an arms race in the private markets space. Industry stalwarts and various fintechs are rushing to market with innovative products and solutions designed for the needs of retail investors.

Amid this surge, the challenge for wealth managers is to meet investor demand, at scale, while remaining in compliance with regulations. Investors have access to private investments through platform and marketplace providers. However, distributing and servicing private assets within managed accounts and model portfolios remains a challenge.

As wealth managers and advisors seek a way forward in this rapidly evolving environment, they face several key considerations regarding education, operations, and enabling technologies. Leveraging the private markets opportunity requires an understanding of the landscape, its inherent complexities, and the fundamental differences from the public markets.  Applying this understanding in go-to-market strategies, technology adoption, and evolving processes is key to successful delivery of private assets portfolios to the retail high net worth investor.

Approaching the Private Markets: A New Frontier

The diverse and fragmented nature that exists across all facets of private markets is not unlike the public markets of decades ago. The challenges of manual subscriptions, disparate processes, and unstructured, disconnected information are compounded by the pace of change and innovation within the industry. Early efforts to democratize were focused on expanding access to private assets – which has been solved through various platforms and marketplaces. Now, we are faced with more complicated challenges: how do we move from access to scale and efficiency in investment selection, portfolio construction and management, and investment servicing?

As might be expected, there is more than one answer. First, education is quickly emerging as an essential focus. The multitude of asset managers, diverse product structures, and complex distribution processes require knowledge and understanding prior to initiating go-to-market operations. Further, education is foundational, not just for advisors and investors, but for the wealth firms standing up investor offerings.
Second, a modern technology foundation with unified data and AI capabilities are quickly becoming table stakes for the efficient management and delivery of private markets portfolios. Again, the diversity of the private markets across data sources, processes, and fund structures require flexible and interoperable technology at scale.

Portfolio Construction and Management

Before embarking on manager selection, there are preliminary determinations to be made. First, wealth managers need to consider how to construct and recommend these multi-asset class portfolios, with the investor needs and requirements guiding the decision making. From there, managers must determine their recommended asset allocation to alternatives, then to private markets and its sub-asset classes. Finally, establishing how the recommended allocation fits within an investor’s overall portfolio is critical, taking into account important factors such as the investor’s time horizon and liquidity needs.

Once asset allocation has been determined, fund selection begins—and complexity enters the picture. The fund structures, liquidity and risk profiles, and terms and conditions are unique and involved – and differ across fund managers and providers. The number of asset managers and fund providers is seemingly endless. Adding to that is the daily launch of new products and fund structures designed to meet the investing and liquidity needs of the retail investor. Wading through this trove of information places critical importance on manager due diligence and investment selection, especially given the constantly changing nature of the asset class.

Onboarding investors presents additional choices and hurdles, including lengthy and legally binding subscription documents, complex fund structures, nuanced terms and conditions, capital calls, and liquidity options. The process can feel unfamiliar, cumbersome, and overly challenging – not only for investors, but for the advisors who are charged with the responsibility of educating their clients and supporting their decision making. In this highly regulated space, wealth managers and advisors also need to ensure they remain in compliance.

Pacing into Investments: Contending with Illiquidity

While manager selection is a high priority, the concept of pacing into these investments is of equal importance. Investment pacing involves forecasting and timing investment decisions to manage capital commitments versus capital calls, liquidity windows, and redemption schedules. Ultimately, staying on track with investment strategies and maintaining allocations across different investment funds and investment cycles over time. An investment pacing approach helps mitigate the challenges posed by the drawdown nature of traditional funds and the illiquidity constraints of both semi-liquid and illiquid funds. A pacing model approach considers the following:

• Investment minimums
• Committed capital versus the length of the draw-down period and capital call schedules
• Cashflow forecasting as part of portfolio construction
• Proxy investing to avoid cash drag
• Liquidity options and considerations
• Distribution/ redemption schedules and reinvestment forecasting

In short, managing portfolios comprising both public and privates requires additional levels of analysis, scrutiny, and sophistication.

Leveraging Technology to Streamline Private Markets Operations

As indicated by the manager selection and onboarding process, managing and delivering these portfolios on an ongoing basis creates complexity. Far too often, we’re seeing a rush to market touting “access” without carefully considering the realities of implementation across the wealth management value chain.  Distributing private market investments to investors is one thing, while managing these investments over time and as part of a long-term investment strategy is another. Both need to be addressed. 

Firms need a solid foundation with modern, interoperable technology and enabling capabilities including cloud, unified data, and AI for scalable operations and delivery. Adopting solutions with these features allows firms to build new capabilities and tools within existing front- and middle-office processes and workflows for seamless integration.

Data as a Strategic Imperative

Centralized enterprise and 3rd party data is a core necessity for wealth management, even more important in leveraging AI to achieve scale and efficiency.  A unified data model underlying end-to-end investment management is even more critical when considering investment portfolios comprised of public and private assets.

The unstructured and disparate nature of private markets data requires a comprehensive data strategy including sourcing, collection, verification, normalization, integration, management, and access across internal and 3rd party systems. Creating a single source of truth will transform how wealth firms provide access to investments, generate better investment insights and investment management, enable and streamline operational workflows, and help deliver on the promise of AI.

Viewing data as a strategic imperative lays the groundwork for streamlined portfolio construction and management of multi-asset class portfolios in a unified managed account (UMA) structure and offering.  This includes public market data such as security master data, positions, pricing, tax lots, and cash balances, combined with private market data including private markets security master data, capital commitments, capital call schedules, liquidity terms, distribution schedules, unfunded capital, and fund performance and valuations. A unified data strategy that supports public and private asset portfolios underscores the larger need for integration across the wealth management value chain.

End-to-End, Integrated Workflows

Critical in all of this is building on top of a modern systems and technology foundation, with forethought around unified data sources and integrated end-to-end workflows. This will ensure delivery of client value at scale while also achieving internal efficiencies and managing costs. Public assets are optimized through automated trading, tax-lot accounting, and real-time risk analytics. Private asset processes by contrast, are still stuck in manual, error-prone spreadsheets, unstructured documents, and capital-call workflows.

Utilizing the power and flexibility of a modern tech and data foundation will allow firms to create integrated processes and workflows for streamlined operations and fewer operational risks. Implementing new technology and operating models to future proof your business will prove uncomfortable in the short term.

Transformation is not easy, but maintaining status quo and putting off these changes will introduce significant incremental costs in the future. The only direction is forward and integrated, data-enabled processes are the future. Short-term disruption will have long-term payoffs.

Conclusion

Bringing private market investing to high net worth investors is a foregone conclusion.  Wealth management firms that adopt a discerning, forward-looking, strategic approach are more likely to realize the promise of private market investments. Participants across the industry are working to solve the existing implementation and operational challenges. Technology partners and service providers can help scale evolving business models, go-to-market efforts, and end-to-end operations. 

The rewards will be worth the effort, providing wealth managers and their advisors an opportunity to better serve their clients while giving investors new sources of portfolio return.