High-net-worth investors are increasing their private equity allocations, but asset managers wanting a piece of the pie face a complicated process to access this type of client – unless they go through one of the larger providers, at a cost, say experts.
Three recent studies point towards high-net-worth investors increasing their private equity investing. Tiger 21’s quarterly asset allocation report for quarter 4 2013, which looks at the aggregate asset allocation exposures of its members, shows that private equity saw a two percentage point increase in allocations to end the quarter at 21% from last quarter’s level of 19% - well above the median allocation of 12%. “Members started to shift allocations to private equity holdings and they have built on and maintained those positions this past year,” says Michael Sonnenfeldt, founder and chairman of Tiger 21.
A study by MainStay Investments, a New York Life affiliate, shows that high-net-worth investors increasingly favor non-traditional investments, with commodities and private equity the most commonly held alternative investment. In another 2013 ultra-high-net-worth investor study from Spectrem Group, investors said they are most likely to increase their private equity investment by two percentage points from the previous year.
The Tiger 21 report also shows that private equity allocations have more than doubled since the last quarter of 2008 when they were 10%.
The move towards private equity is a strategy for diversification but it is predominantly because investors are seeking higher returns, says Chris Mackay, partner at Private Advisors, an alternative investment boutique that subadvises MainStay's Private Advisors Alternative Strategies Fund.
And the trend is not just a short-term spike in allocations, says Kevin Albert, managing director at private equity fund-of-funds managerPantheon Ventures. “As is typical, after a long successful run in the public market, the investors like to take some chips off the table. They get nervous about giving it back to the public market and feel they can mitigate this risk by shifting assets to private real estate and private equity investments,” he says.
And even though stock markets did well last year, it has not deterred investors away from the private markets. “It could be that these investors trust their managers more than they trust the markets,” says Cathy McBreen, president of Spectrem Group’s MillionaireCorner.com – a wealth industry consulting firm.
Managers looking to pick up some of this increased interest need to be able to tell a story investors can relate to, says Mackay, adding that investors are looking for something different from the usual large leveraged buyout area. “High-net-worth investors are looking at niche strategies like private investments with royalties, direct lending and small company private equity,” he says.
In particular Albert predicts that real estate, private credit and buyouts - if it is a good name, will do well. “Venture capital, however, is a hard sell,” he adds.
But what can a manager do to attract these types of investments in a difficult access market? There are two primary ways high-net-worth investors invest in private equity, says McBreen. “The first is access to friends and family, who in turn refer them to the appropriate person or fund in charge of those investments [word of mouth],” she says. “The second is very high-end investment advisors who have access to these types of customers,” she adds.
Another route is to knock on the doors of family offices – but this is no easy task. Private equity managers can also access high-net-worth investors through private bank platforms, broker/dealers.
The most straightforward way for private equity firms to access this market is via wirehouse offered feeder funds. “They will vet potential managers, package a deal, distribute it through their wealth managers and then take a fee for it,” says Albert.
“Getting into a relationship with larger providers might be a better way to get access even though it could mean a share of the spoils,” McBreen adds.