Exploring the breadth of private assets available to wealth managers 

Private markets may play a key role in long-term investment strategy, could potentially offer risk-adjusted performance and diversification benefits than publicly traded asset classes. Over the long run, we expect portfolios that include private assets to outperform those that do not.

For wealth managers, this can be important in remaining competitive, but access to private markets has traditionally been hindered by high investment minimums, complex cash flow management, and suitability issues. 

Tech-enabled platforms have lowered investment thresholds, simplified cash flow management processes, and streamlined suitability assessments, potentially making it easier for wealth managers to access private market funds at institutional pricing. These platforms can provide sophisticated analytics for detailed portfolio insights, modeling tools, and comprehensive investment overviews across various dimensions. With a diverse range of funds onboarded, wealth managers can now help clients build customized portfolios tailored to their specific goals. 

Below, we explore how wealth managers can potentially diversify their client’s portfolios with the breadth of private assets that are becoming increasingly accessible to them.

Private equity involves investing in privately held, non-publicly traded companies. Private equity firms take an active approach, working closely with company management to make strategic and operational improvements. Investments can range from large buyouts to venture capital with a higher target return. Allocation decisions should align with portfolio objectives and should involve building relationships with high-quality managers across geographies, strategies, and vintages.

Private debt is a form of non-bank lending, where lenders partner directly with borrowers. These loans are generally secured against company cash flows or assets, offering higher yields and increased security. This allows for flexibility in negotiating terms, which may result in higher yields and greater investor protection than traditional credit markets. This alternative form of lending fills the gap left by traditional banks and may provide opportunities for investors to diversify their portfolios and potentially achieve higher risk-adjusted returns.  Private debt is an attractive option for investors looking for stable income, due to its low correlation with other assets and resilience during economic downturns and inflationary periods, thanks to its floating interest rate nature.

Credit opportunities is a sub-asset class within private debt, providing broad opportunities that are more opportunistic than strategic in nature. They typically offer higher target returns compared to private debt ─ primarily due to their flexible mandates, which allow for a range of lending types, including secondary and primary. These flexible mandates enable a quick response to changes in economic and credit market conditions, with a greater focus on capital appreciation rather than income.

Infrastructure is an asset class that emerged in the mid-1990s and has continued to gain greater acceptance from institutional investors over time. Traditional infrastructure focuses on investing in the fundamental components of an economy, such as roads, hospitals, and public utilities. More recently, newer subsectors within infrastructure, such as digital infrastructure (data centers and fiber optic networks) and energy transition infrastructure (renewable energy but also energy storage/efficiency), have become more mainstream. Infrastructure investments are meant to provide steady, reliable returns across a wide variety of economic conditions while offering the potential for inflation protection. Returns are generally inclusive of a cash yield, which can be beneficial for investors who seek income as well as total return.

Private real estate investing involves taking an unlisted equity or debt interest in a property, collection of properties or property-related businesses. The combination of income and growth places real estate at the crossroads of fixed income and equity strategies. Real estate can offer a diversified income stream from leases and ancillary income; it may also provide diversification benefits from private equity and private debt, with the potential to act as a hedge against inflation through rental increases.

Secondaries involve the buying and selling of existing investor positions in private market funds, providing liquidity and exposure to established portfolios. They help mitigate the J-curve effect¹  by quickly deploying capital compared to primary funds. Investing in an existing portfolio also can offer transparency and evidence of value creation. General Partner (GP)-led secondaries, also known as continuation funds, may provide access to trophy assets.

A co-investment is an investment in a specific company alongside a GP; co-investments are available across the private market spectrum. This differs from a direct investment in which an investor physically buys a stake in a company and relies more heavily on their own due diligence (which is materially different to a co-investment where an investor would rely heavily on the due diligence of the GP). Co-investments can potentially enhance a traditional private equity portfolio's risk/return profile by offering swift exposure build-up through single company investments.

Historically, private equity funds were primarily structured as closed-end funds with 7-10-year lock-up periods, which posed challenges such as the J-curve effect and the need for complex over-commitment strategies. These funds are usually fully invested from the start, avoiding J-curve issues, and they eliminate the need for over-commitment, capital calls, and complex reporting. Additionally, the open-end structure typically offers capped monthly or quarterly liquidity, addressing the limitations of long lock-up periods.

Wealth managers are increasingly recognizing the value of private markets in helping enhance long-term investment strategies, offering potential advantages in risk-adjusted performance and diversification. We believe, with continued growth in accessibility, portfolios that integrate private assets are expected to potentially outperform those that do not.

However, effective allocation to private markets requires a client-centric approach. Wealth managers should carefully assess each client’s unique financial goals, risk tolerance, and liquidity needs before incorporating private assets into their portfolios.