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Private wealth to increase allocation to private equity

Private wealth to increase allocation to private equity
High-net-worth individuals and family offices are hunting for yield, concerned about low interest rates and market volatility
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The hunt for yield continues for all investors, with most private wealth managers and high-net-worth individuals now actively pursuing a private markets strategy. Denise Ko Genovese reports

With the extended period of low interest rates and market volatility still a concern, the hunt for yield is on, with high-net-worth individuals and family offices – who have typically sought more traditional investments – joining the pack. According to the Global Family Office Report produced by UBS in partnership with Campden Wealth Research, 55% of family offices expect a market downturn in 2020 and nearly half of those are responding by shifting their investment strategies to reduce risk. One of the ways they intend to do this is by increasing their allocation to alternatives such as private equity. 

Of the 360 families surveyed for the report, 81% already have allocations to private equity. The majority invest through funds, a third invest in funds-of-funds, and a smaller proportion do direct investments. A total of 39% of the families said they planned to invest more in direct private equity in the coming year, while 28% said they intend to invest in more private equity funds. Currently, the average allocation is 19% (up 0.7% on the previous year) compared with a 32% allocation to global equities. 

It is easy to see the rationale behind the increased enthusiasm to invest. Private equity investments delivered an average return of 16% for direct investments and 11% for funds-based investing to those families surveyed, compared with 2.1% for developed market equities and -1.1% for developing market equities. 

One reason behind the increased openness towards the asset class is due to the next generation taking over management of the family wealth. 

"For the previous generations, private equity was an asset class behind closed doors, with traditional liquid assets being more favoured," says Meiping Yap, director of private capital at Stonehage Fleming. "But roll forward to today, where private equity has delivered strong and consistent returns compared with public equity markets, the next generation of high-net-worth individuals are exhibiting a greater affinity to the asset class. Moreover, we are also seeing the next generation starting to have a greater influence over their family's wealth strategy and portfolio construction."

Growing in popularity
The next generation – who according to the UBS and Campden report typically take over management of the family's wealth at roughly 45 years of age – are also attracted to the asset class because their family wealth has often started with a private business. As such, the next generation has often grown up with the types of risks and rewards associated with private equity investing, Meiping says. 

Stonehage says its families have been scaling up their allocations to private equity, which is in line with the global market trend. Of the 250 families it looks after, around 45 have an allocation to private equity through their discretionary annual fund programme and between 10-25% of each family's investment pool is currently dedicated to private equity. 

"Private equity investment being greater now than it was a couple of years ago is definitely also a reflection of the current low-yield environment," says Meiping. "Essentially you are not getting paid to hold cash or low returning asset classes, so private equity really stands out in today's market environment because of its proven track record of delivering outperformance through the cycle. That is a discourse that transcends families."

Alternative approach
The hunt for alternatives is true of high-net-worth individuals and some retail investors, too, with an increasing openness and desire to have access to different products. 

"The general view is that people are looking for something different," says Megan Smith from FLM Wealth Management, a principal partner practice of St James's Place (SJP). "It isn't necessarily private equity specifically, as it is still considered niche, but more something that does not correlate to equities. Even the high-yield bond market correlates to equities to some extent, so for funds with a longer-term outlook of 7-10 years, people are asking whether they can put their money somewhere slightly different with private-equity-style institutions." 

With this in mind, the team at SJP, whose clients are within the top 1% of high-net-worth individuals in the country, launched a new diversified assets fund with some of the underlying investments in private equity, says Smith. SJP Diversified Assets is a fund-of-alternative-investment-funds, managed by KKR, that will typically invest in a range of unregulated collective investment schemes in order to gain exposure to asset classes, including, but not limited to, private loans, syndicated loans, asset-backed securities, secured and unsecured bonds, private equity, real estate and infrastructure. It is a segregated account for SJP clients. 

"People are [financially] savvier than 10 years ago," says Smith. "There are many online providers and platforms such as Nutmeg these days, so people are more informed about alternatives compared with traditional funds. In general, people are thinking about capital preservation, as it has been a 10-year bull market and people are asking how they can be protected if there is a global downturn. They do not want something that purely tracks the stock market."

SJP's new fund comes at a time when private equity managers are also trying to cash in on the increasing familiarity of their industry, and creating structures and routes to access for retail investors. 

In October 2019, Fideuram Investimenti launched a private markets fund that provides private investors with access to private equity and private debt, among other asset classes. The target size of FAI Mercati Privati Europei is €300m, with a first close in December 2019, Fideuram Investimenti CEO Gianluca La Calce told Unquote. This was after Schroders launched a specialist private equity fund-of-funds targeting a larger pool of clients via monthly subscriptions and quarterly redemptions in the same month, and Italian Mediobanca launched its second fund for private clients.

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