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GPs look past ‘fast money’ in private wealth

Brand name managers have been expanding into private wealth to reach under-allocated investors. Now they are finding ways to ensure these investors stick with them for the long-term…

This article first appeared in the December 2022 Investor Interest Insights Report

Brand name managers have been expanding into private wealth to reach under-allocated investors. Now they are finding ways to ensure these investors stick with them for the long-term…

With many institutional investors hung by the denominator effect, larger fund managers have been focusing on private wealth.

In its third quarter results, Blue Owl said it pulled in $3.6 billion from the investor segment between July and September – a 300% increase on the same period last year which pushes the proportion of retail capital raised at around 40% of their total. On their earnings call, the company described private wealth as “a very big white space”. A growing list of managers is about to draw all over it. Alongside Blackstone and Apollo, EQT and Partners Group are among those who are increasing their ambitions here. Currently about 8% of EQT’s client base is private wealth. Partners Group is targeting about a third, but says it is unlikely to go far above half of total capital committed.

“I expect [private wealth] allocations to increase irrespective of current short-term developments. By and large, we are nowhere in terms of allocations and I doubt that many of our underlying clients have similar problems like the institutions when it comes to the denominator effect,” says Christian Wicklein, global co-head, private wealth, Partners Group.

According to Private Equity Wire’s survey, private wealth was the only segment where all respondents intend to either maintain or increase their exposure to private equity.

For institutional investors and asset managers, the proportion planning to reduce their exposure over the next 12 months is 18% and 7% respectively. Private wealth also appears comparatively more bullish than other investors on sectors such as financials and energy and fund strategies such as distressed/ turnaround and secondaries.

Not all private equity funds are in a position to capture these flows, however, and it is the larger franchise names that have been among the first to set-up shop and hire teams targeting the space. Some GPs have been acquiring or leveraging wealth management firms and, geographically, hoovering up demographic pockets of high-net-worth (HNW) individuals, for example in Asia and the Middle East. Looking forward, the “white space” described by Blue Owl might seem limitless as it overlaps with HNW retail investors – the average retail investor holds only around 2% in alternatives, according to consultancy McKinsey, with the potential to more than double over the next three years.

The perceived risk, for managers, is that these private wealth flows can be fickle in a more volatile market – they can be turned on and turned off, particularly by less sophisticated ‘mom and pop’ investors.

“Fast money’s great when markets go up, but it can also bite you when things get a bit choppy,” says one private wealth fundraising source.

There are competing views on the ‘fast money’ hypothesis. Retail platform Moonfare said in November that “economic concerns have not significantly dented [their] investors’ faith in private equity as an investment class” – 83% are still considering new allocations over the next 12 months as infrastructure, secondaries and private credit have come more into focus. A few weeks earlier Moonfare’s CEO was even more positive, describing macro volatility as a turning point for private wealth, as individual investors “take refuge in private markets”.

However, another survey released in the same month by RBC BlueBay Asset Management found that international wholesale investors do not expect to significantly increase their allocation to private markets over the next three to five years and just over half of expect public markets to outperform private markets in the same period.

Those close to the private wealth segment say using trusted intermediaries and finding diversification across investor type and region are key to avoiding knee-jerk outflows when markets are rocky.

“I don’t think there’s any feeling that it’s like hot money, or it’s ‘here today, gone tomorrow,’” says Tarun Nagpal, founder and CEO at S64, an intermediary platform for private wealth. “Remember, the majority of the market is advised. And the banks themselves are putting a huge amount of resources into building these private markets franchises so they have to do the right job in advising clients for the long-term.”

On the same Blue Owl earnings call, the company was keen to point out it had “virtually no” redemptions in the second and third quarter but added “we all want the flows to be very consistent and every quarter up to the right. But… that’s just not how markets work.”

Partners Group says it provides a liquidity window on its evergreen funds which is around 5% of the total fund size per quarter but says that education and building awareness is what really helps to ensure the allocations are long- term and sticky.

“If you want to be successful, and really scale globally, you need to have multi-currency funds, local language materials and teams and do much more differentiated outreach and marketing than a few years ago when the whole space was still new,” says Wicklien.

This is how fund managers are preparing for the next leap in private wealth: matching their offering more closely to the needs of their individual investors. The next trend is expected to be customised mandates where private investors can allocate to a GP across a number of strategies, for example on a defensive or dynamic basis.

According to Moonfare, illiquidity, fees and the long-term investment horizon of private equity are the biggest hurdles to new private wealth allocations. But perhaps it’s actually private wealth’s investment priorities, rather than flows or allocations, that are faster moving.

Institutional investors have taken the lead in sustainability, particularly in Europe, but in the Private Equity Wire survey, private wealth respondents ranked ESG as a much greater priority – and more than liquidity, fees or performances.

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