In the ever-evolving landscape of investments, a significant trend is reshaping how wealth is grown and managed: private asset managers are increasingly opening their doors to high-net-worth and retail investors. Traditionally, private investments such as private credit/lending, real estate, and private equity were the exclusive playground of institutional investors and qualified purchasers (someone with an investment portfolio with a minimum value of $5 million or more). However, recent years have seen a paradigm shift. Why is this happening, and what does it mean for all investors?
A big part of the allure of private assets is the ability to generate attractive returns without taking excessive risk or sacrificing portfolio diversification. Traditional public stocks and bonds are susceptible to market volatility, economic downturns, and emotionally driven investor decision-making. Private assets, often not directly correlated with public markets, can offer a differentiating return stream and potentially provide more stability.
Historically, private markets tend to exhibit lower volatility than traditional public markets. Part of the reason for this may be that the assets are not priced instantaneously like their public counterparts. Think about your personal residence. Technically, the price fluctuates daily, but because you are not actively marketing the house as for sale, the valuation can be seen as more consistent month-to-month.
As wealth managers, we view the lower implied volatility of private assets to be of the utmost importance in portfolio construction and a large determinant of the success of our client’s financial plans. Considering that 87% of all companies generating revenue greater than $100 million are privately held[1], we view private asset investments as crucial to our clients’ asset allocation.
For more additional information on how our firm views and approaches alternatives, check out our CIO David Copeland’s blog on alternative investments.
In the “old world,” capital call vehicles reigned supreme. You made a commitment to a fund, where they called your capital over time, and you were in the fund for its entire life, which typically spans 10-12 years[2]. Some qualified purchasers, who had previously had access to the world of private assets through limited partnerships, were not fans of the traditional 10-year lock-up and limited partnership structure. Given the abundance of wealth in the retail space of investors or those with less than a $5 million investment portfolio, there was a push for a change. Private asset managers wanted to create a new structure to provide for more frequent liquidity opportunities and to enable a new class of investors to have access to their products at lower minimums.
Enter the interval fund. An interval fund is an investment structure that periodically offers to provide liquidity for its investor despite being made up of mostly or completely private assets [3]. These vehicles are like mutual funds in that you can buy them daily. But when it comes to selling, pre-defined trading windows are offered periodically throughout the year to sell some or all of their investment if necessary. Interval funds also allow all investors to get access to private asset investments with lower minimums than traditional limited partnerships.
Innovation in financial technology has made it more feasible for private managers to efficiently manage a larger number of smaller investors. Technology platforms now exist that can manage the increased administrative load of multiple small investors, whereas it was once only cost-effective to manage a few large ones. This tech-driven efficiency makes it economically viable for private asset managers to work with retail investors. So, the reluctance from these managers to open the floodgates to all investors has been severely mitigated.
The push by private asset managers to provide greater investor access reflects inclusivity in a previously unobtainable space. This shift is not just about providing new sources of capital for private managers, but also about providing all investors with opportunities that were once out of reach. As this trend continues, it will reshape investment strategies and portfolio management across the spectrum of investors.
I’m proud to work at a firm that has always been at the forefront of this movement, and I am excited to see what changes and opportunities for our clients are on the horizon. If you have any questions about private assets or how and why we use them in client portfolios, please reach out to a member of our team.
[1] Apollo Academy, Many More Private Firms in the US (Link)
[2] Duane Morris, Transfer of Limited Partnership Interests (Link)
[3] Investor.gov, Interval Fund (Link)
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