Alt Investments

HNW Investors Must Raise Their Private Markets Ambitions – Hightower Advisors

Tom Burroughes Group Editor March 29, 2024

HNW Investors Must Raise Their Private Markets Ambitions – Hightower Advisors

This news service interviews the Chicago-headquartered firm about the need for advisors to educate and guide clients on the importance of private markets.

There’s a relentless drumbeat of noise about the need for HNW individuals to ramp up holdings of private market and alternative assets to diversify and capture returns, but they’re still lagging behind large institutions.

And with so-called “evergreen," aka perpetual structures becoming a more prominent feature of the private markets space, there’s also a new way of accessing these relatively illiquid areas.

Robert Picard, managing director and head of alternative investments, Hightower Advisors, said the shift toward private market investment needs to happen. His firm has plenty of weight in the area, with $142 billion of assets under management, as at the end of 2023.

The average university endowment fund, or billionaire, has approximaely more than half of their assets allocated to private markets. With individual investors, on the other hand, the average exposure is less than 5 per cent. The traditional 60/40 split is still a dominant approach, he told Family Wealth Report in a recent call.

“We now know that portfolios with large allocations to alternative assets tend to deliver better risk-adjusted returns,” Picard said. “Clients have to be rewarded with higher risk-adjusted returns in exchange for [taking] accepting that illiquidity.”

The structure of American capitalism, in terms of how firms are owned, has shifted in the past four decades. There are fewer firms listed on US exchanges. In 1976, the US had 4,943 firms listed on exchanges. By 2016, it had only 3,627 firms. From 1976 to 2016, the US population increased from 219 million to 324 million, so the US went from 23 listed firms per million inhabitants to 11. (Source: National Bureau of Economic Research, 2018.) Instead, privately-held firms have become more significant. However, for years, investors have had to put up at least $1 million to enter private equity – and sometimes far more. 

With the rise of fintech platforms such as iCapital and CAIS in the US, and Moonfare in Europe, there is a gradual shift toward improving access to private markets. Regulators such as the US Securities and Exchange Commission are mulling ways to assist the process – in a controlled way. The SEC, for instance, has adjusted the Accredited Investor rules to widen access to some extent.

In Europe, this news service was told at a Luxembourg funds conference about how regulators and fund providers are looking at how to make alternative funds more open to retail/affluent clients. In the past, regulators have not deemed illiquid assets as suitable for retail investors. 

Guidance
Education and guidance of clients is important, Hightower’s Picard said.

If one takes a snapshot of all the US companies that generate more than $100 million in revenues, approximately 87 per cent of them are still privately held firms, Picard said. “We can provide private investment solutions to complement traditional public equities and fixed income portfolios,” he said. 

The minimum AuM that clients have to put into private markets used to be in the region of $25 million, but that’s changing. “Evergreen” structures are “levelling the playing field,” he said. “That’s what we are witnessing right now.”

Evergreen structures are open-ended funds with no termination date. They can recycle capital from realized returns and are not bound by the same time constraints as other private market investment vehicles. In the case of US investment group Blackstone, for example, a perpetual fund it has created allows 2 per cent to a maximum of 5 per cent of the fund’s value to be liquidated per quarter. The firm said this sort of structure is well suited to the mass-affluent segment, with minimum investment ticket sizes of $25,000 – way below the much larger minimums that private equity, credit and other non-public funds often ask for.

Picard is enthusiastic about such developments. 

“The democratization and miniaturization of private markets also benefit our capital markets,” he continued. “These portfolio allocations to private markets require investors to take a longer-term market view. If people go from five, 10 to 20 per cent allocations via evergreen vehicles then you are going to see a wave of more than $1 trillion of new assets moving into these markets over the coming years,” Picard said.

There are other forces driving change, such as in the private credit fund space, he said.

The decline in the number of US community banks, and consolidation among such regional/local lenders, means that private credit funds are stepping in and filling the lending gap. This is mainly due to shifts across the traditional lending ecosystem away from community banks due to rising rates, he said.

“The C-Suite leadership teams currently in place across corporate America have just experienced and survived a global pandemic, supply chain disruptions, rising interest rates, labor force shortages and inflation. These professionals represent some of the most sophisticated operators we’ve seen across multiple generations of corporate leaders. We see private credit funds taking advantage of this environment to generate better risk-adjusted returns than traditional public fixed income,” he said.

“We are in a normal cycle now and there will be a reasonable amount of rising defaults. This is quite healthy,” he said. “All of this is going to benefit investors [across multiple asset classes]: they become the bank,” he said.

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