Strategic partnerships, tech enablement and education will be key to effectively accessing the growing pool of capital in the wealth management market, says Brian Ruder, co-managing partner at Permira
What has been driving increased appetite for private markets among private wealth investors in recent years?
Demand has been driven by improved awareness of the role private markets can play in helping to achieve investment goals such as enhancing returns, diversifying risk, supplementing income and preserving capital. Furthermore, as private wealth investors and their advisers come to recognise that private markets go beyond traditional private equity to include private credit, infrastructure, venture capital and real estate, this has facilitated thinking beyond the traditional 60/40 portfolio, expanding the equity and fixed income buckets to include both public and private solutions.
At the same time, the number of publicly traded companies is shrinking as more and more businesses choose to stay private for longer, which in turn means public markets are no longer as good a proxy for the economy. Finally, a significant generational transfer of wealth is underway with more than $84 trillion in assets expected to change hands over the next 20 years, according to data from Cerulli. Gen X, Millennial and Gen Z recipients are expected to inherit $72 trillion of that sum. These younger generations are more likely to allocate to private markets.
How has the private markets industry responded, and why is this proving such an attractive opportunity for managers?
The wealth management market represents one of the largest and fastest growing pools of capital. According to Bain & Company, individual investors held roughly half of global wealth in 2022 – somewhere between $140 trillion and $150 trillion – with institutional investors holding between $135 trillion and $145 trillion. However, individuals account for only $4 trillion in alternative assets under management with average allocations of between 3-5 percent against a typical target allocation of more than 20 percent.
The private wealth market therefore clearly represents a significant opportunity for private markets managers, who are looking to establish long-standing strategic partnerships with wealth managers as a result. Competition for these partnerships is fierce, however, and making them work requires dedicated coverage teams, given the multi-layered and more complex decision-making and reporting processes involved.
In recognition of the potential that the wealth market represents, Permira has built a dedicated wealth team, and will be opening strategies up for private bank distribution for the first time with the next fundraising cycle.
What have been the key inhibitors that have prevented greater involvement from private wealth investors in private markets in the past, and how have these been resolved?
Technology and innovative structures have played an important role in increasing access and reducing investment minimums. Technology has also proved critical for removing some of the hassle factor that has often been associated with alternatives.
These asset classes still typically represent less than 5 percent of an average client’s portfolio, but the operational friction created by subscription documents, capital calls, distributions, reporting and tax statements means that private markets investments have historically taken up a disproportionate amount of time and energy when compared with the rest of the portfolio. Of course, illiquidity and a lack of transparency have also been key inhibitors in the past, but new structures are helping to alleviate those challenges.
The move to raise capital from the wealth market has been a major trend over the past couple of years. What do you think it will take to be successful?
First, I would point to the importance of building long-term partnerships with distributors. This means providing a full suite of investment solutions across funds, asset classes, structures and co-investments, as well as
enablement solutions across education and servicing, to help wealth managers and their clients achieve their asset allocation and diversification goals.
Brand equity and loyalty will also contribute to success. Managers will need to be recognised as trusted partners, innovators and investors in private markets, while delivering strong and consistent returns over the long term, in order to drive those multi-vintage partnerships. Finally, technology enablement will be critical. Managers will need to leverage technology solutions to deliver a superior wealth manager and end-client experience.
What new structures are emerging, and how are they supporting private wealth access to private markets?
We have seen an evolution in how alternative investments are delivered to the wealth channel. Feeders have been around for decades as a pooling mechanism, but over the past 10 years we have seen the emergence of tech-enabled feeders, which has removed a lot of the operational friction and has increased distribution.
Meanwhile, the enhanced flexibility and liquidity provided by the proliferation of evergreen funds that has taken place over the past two to three years has proved critical to unlocking private wealth demand.
What is the role of education in supporting private wealth demand, and what has your approach been?
We see education as playing a critical role in the adoption of the asset class in this segment, and as a GP we view it as our responsibility to educate our clients and to help them navigate the private markets landscape. Education is multi-layered and takes many different forms, but ultimately we want to ensure that advisers and their clients understand what they are investing in and how it plays a valuable role in their portfolio.
Education is also required to communicate the sheer scale of the market opportunity. The reality is that many of the most exciting and successful companies in the world today are choosing to stay private. Consider for a moment that Google went public with a market cap of around $23 billion. Buying public equity allowed investors to participate in a growth story that has reached a market cap of around $2 trillion today. Compare that to OpenAI or SpaceX, which are still private companies valued at around $150 billion and $210 billion, respectively. Market dynamics have changed. The iconic companies of tomorrow are staying private for longer and not relying on public markets as a source of capital. Private markets are therefore the only way of accessing and participating in these opportunities.
Private wealth clients also need education on the key long-term investment opportunities available in private markets. From generative AI to energy grid modernisation and healthcare outsourcing, we believe that educating clients on the mega-trends that are underpinning the growth of the global economy is vital. Other areas where education may be required include the importance of diversification and the different ways in which private equity managers generate value.
Finally, of course, there are certain risks that private wealth investors need to be aware of. It is important to highlight that this asset class is not for everyone. We must work with advisers to identify the right types of clients for this investment approach. Balancing the advantages of the asset class with key considerations including transparency, liquidity and sometimes complex fee structures relative to public markets is paramount.
Which asset classes within private markets are best suited to private wealth?
PE, real estate, VC, infrastructure and private debt all provide different advantages to private wealth portfolios, depending on goals, return objectives and risk tolerance. Alternatives have the potential to provide enhanced return and income potential, broader diversification and lower correlation, and exposure to a more diversified and representative set of the economy.
Take private equity, for example. According to S&P Capital IQ, just 13 percent of US companies with revenues of more than $100 million are currently publicly traded, and this number is steadily declining. This means investors are missing out on value creation opportunities in the 87 percent – roughly 19,000 companies – that remain privately owned.
It is vital to emphasise the importance of manager selection, however. Over the past 10 years, there has been a 21 percentage-point difference between top-quartile and bottom-quartile private equity managers, per data from Burgiss and JPMorgan Asset Management. This highlights the variability and risk associated with investing in this asset class and how critical it is to pick the right partner.
Meanwhile, on the credit side, direct lending has historically generated attractive risk-adjusted returns and lower volatility compared with other fixed income alternatives. In particular, we believe European direct lending is an attractive opportunity, as direct lenders have displaced banks to become the primary source of funding for mid-market companies. The highly fragmented nature of the European market allows GPs with a long-standing presence and track record to build strong, diverse and resilient portfolios.
Just how significant a role do you see private wealth playing in private markets going forward, in relation to the institutional market? To what extent will this change the nature of the industry?
We believe that institutional demand will remain at the heart of the private markets industry. And, as a private partnership, we are not subject to the same pressures faced by many market players to increase AUM. However, we see a clear opportunity to diversify our investor base by accessing the fast-growing private wealth channel. This is why we have invested in building a wealth coverage team to support our growing efforts in this space and why we will continue to invest in making sure we are delivering the best experience and outcomes for wealth investors.
First and foremost, however, our focus as a firm is to be a good steward of capital for all our investors – both private wealth and institutional – backing compelling growth companies and generating consistently strong returns. That will never change, and as we continue our wealth journey, we will stay true to our DNA.
