New research into the opportunities in private assets for wealth management clients has found there is significant interest amongst wealth managers to invest in private assets on behalf of clients, with 80% already doing so. This is seen as a way to bring greater diversification and return potential to their clients’ portfolios. There are barriers though, including operational and regulatory challenges and a lack of appropriate investment vehicles, that are standing in the way of greater allocations.
The research, conducted by the Investment Association and Goji, a provider of regulated platform technology, also focused on the new fund structures that would facilitate investment in private assets, including the new Long-Term Asset Fund (LTAF)*.
The research found that many wealth managers are already making small allocations to private assets, including private equity, real estate and infrastructure, as they seek to provide additional sources of diversification, enhanced performance, and an alternative source of income. There is also significant potential for further growth, as wealth managers are allocating on average only 5% of their total assets under management to private assets and see greater allocations in the future as a way to enhance client outcomes. The majority of wealth managers also believe demand from their clients for private assets will increase.
However, respondents noted a number of barriers to investing more in private assets, including the availability of appropriate fund vehicles; the regulatory barriers that prevent their sale to all but the most sophisticated and wealthy retail investors; and the higher costs involved with private asset investments. Unsurprisingly, the issue of liquidity expectations on the part of clients also featured strongly.
The LTAF was developed in part to address the lack of appropriate fund vehicles to invest in private assets. 71% of wealth managers surveyed had heard of the LTAF, and around one third said they were likely to invest in a fund such as the LTAF. Given that the fund structure was still being consulted on, and with no LTAF products being available at the time of the research, this is a higher level of awareness than expected. However, given concerns also expressed in the research about the limitations of distribution rules, it remains to be seen how the private wealth market will initially react to the LTAF. The FCA plans further consultation on LTAF distribution in due course.
Jonathan Lipkin, Director, Policy, Strategy and Research at the Investment Association, said: “This research clearly shows that wealth managers are keen to diversify their clients’ portfolios through greater access to private assets. While there are barriers to doing this, the new Long-Term Asset Fund could play an important part in starting to remove those constraints.
“A critical next step will be the evolution of distribution rules which currently remain fairly restrictive. As the first LTAFs come to market, and the FCA consults further, we hope to see more movement on distribution to allow private wealth clients and retail investors to fully benefit from this new fund structure.”
David Genn, CEO at Goji, said: “While the LTAF does not necessarily represent a silver bullet for advisors seeking access to private equity, for fund managers who haven’t yet tapped into the high-net-worth market, the LTAF structure could represent a compelling starting point to reach this audience.
“When coupled with innovations that streamline back-office operations and deliver efficiencies that enable distribution at scale, we believe the launch of the LTAF represents an important milestone, as private assets are increasingly made available to a wider and more diverse audience.”