High-net-worth allocations could represent an additional $1.5 trillion-worth of assets under management by 2025, according to an estimate in a recent report from Morgan Stanley. What does that look like in more familiar terms, and how will these HNW portfolios be comprised?
Products in the areas of venture capital and real estate, like REITS or real assets, traditionally make up a lot of alternative assets exposure for individuals. A chief question for most alternatives products is one of access, after all. It is much easier for a wealthy individual to buy an apartment building than a stake in private equity fund without help from a wealth manager.
HNW investors can now find themselves in multi-manager feeders, single-manager feeders and direct offerings – Partners Groups’ commingled fund was an early success here – courtesy of an investment bank or fintech provider (often in partnership). Those feeders can lead to established managers like Blackstone and KKR, or into proprietary products at wealth managers.
David Newman, who previously worked in wealth management at Barclays and UBS and is currently co-founder and chief commercial officer of wealth management software provider Delio, splits HNW into three floor limits – $5 million, $50 million and $500 million, roughly speaking – when assessing categories for demand.
Weighing in above $500 million means family office status, whether formally or otherwise. This group benefits from investment staff who bring expertise and professionalism. They also enjoy more or less regular access to co-investment dealflow – a key in making alternatives exposure more efficient – on the backs of GP relationships. While there are different mindsets, firms within this group tend to follow the endowment model, since they don’t have the same liquidity concerns as insurers and pensions. Strong allocations in the 60-70 percent range to alternatives and real assets are not uncommon here.
The $50 million-$500 million group is where things start to vary more widely, says Newman. Banks tend to recommend between 15 and 20 percent as an allocation to alternatives, although it is difficult to generalise due to the need to match up liquidity with current income requirements and risk-weighting with risk profiles.
Direct or traditional?
Some clients only want directs, and avoid anything they see as diversified. New wealth creators, who are often entrepreneurs, will turn around and invest in ideas or individuals they find compelling. “So much [heart and mind] goes into private market allocation for an individual wealthy client or for a HNW client,” says Newman.
Other investors are more traditional. “Let’s create a programme that’s diversified over five years. A target allocation is 50 million. So, let’s allocate 75 or 100 so that the J-curve funds itself. Let’s reserve 20 percent of capacity for doing a kicker. Those are smart and sophisticated [portfolios],” says Newman. Further, this mid-range group is currently experiencing a robust gain in access to co-investments.
The lowest group, $5 million-$50 million, will usually opt for one or a few products like Partners Group’s commingled fund or some in-house equivalent, if anything at all. Much of this group’s capital may be tied up in businesses or other assets.
Fortunately for them, Newman predicts banks will be able to provide access to co-investment and direct deals at all levels in the next three to five years.
Speaking generally – which, again, is nearly impossible in this context – portfolios that have 50 percent private equity exposure, 25 percent to private credit, and 25 percent to real estate and infrastructure wouldn’t be uncommon, says Newman.
“A lot of it, you need to remember, is wealth managers aren’t as sophisticated of allocators,” he adds. “They’re a lot more opportunistic around what’s coming up. You very, very rarely get well-constructed portfolios.”