Wealthy individuals have typically been under-represented in private markets. High entry minimums and unwieldy investment fees have proved a significant barrier, while the comparatively low investments they’re able to provide – starting from $50,000, on average – are sometimes considered more trouble than they’re worth to GPs at the larger end of the spectrum, given the time and admin involved with raising capital at scale.

However, the opportunity set is becoming harder to ignore. According to Credit Suisse’s 2021 Global Wealth Report, 2020 was the first year on record where more than 1 percent of adults globally were dollar millionaires. Capgemini’s World Wealth Report 2021, meanwhile, notes that unprecedented stock market gains and a volatile global economy drove a 6.3 percent increase in the world’s HNWI population in 2020, in addition to a 7.6 percent jump in the segment’s total wealth. With such vast and growing amounts of private wealth now up for grabs, savvy managers are finding ways to make this unique brand of capital work for them.

Different methodologies

Approaches to this expansive opportunity set can vary, with firms often differing on which subsegment of investor to target. Joan Solotar, global head of private wealth solutions at Blackstone, tells Private Equity International that perpetual products have allowed the firm to target a huge market, particularly of individuals with $1 million to $5 million in investable assets. These private wealth clients access Blackstone’s private equity offering via a dedicated relationship manager, she says, and will typically enter through a feeder fund which pools the capital commitments of various investors and feeds them into a master fund. The main benefit of this structure is that, by achieving economies of scale, the centralised fund experiences lower administrative costs, and therefore operates more cheaply than several small funds.

Other firms prioritise much bigger fish. The bedrock of Cambridge Associates’ private wealth business, for example, is family offices, rather than the mass affluent. This means the typical client already has some experience of investing in private equity.

“We advise 50 or so family office clients in Europe, and they range in size from – at the low end – $100 million or so to – at the high end – multiple billions,” Chris Ivey, head of Cambridge’s European private client practice, tells PEI. “This instantly takes them into what I would call the institutional approach to investing.”

While Cambridge works with both types of client, there can be some distinctions between newer private wealth clients and fourth or fifth-generation families. Ivey notes, “Many multi-generational families come with a structure that is once removed from the wealth owners and looks and feels institutional, while often we find newer wealth owners in a position where they benefit from our ability to transfer knowledge, experience and insights from our later-generation clients in helping with governance and institutionalising their wealth.”

Nalika Nanayakkara, wealth and asset management consulting leader for Americas at EY, tells PEI that the threshold for affluent individuals has been pushed down in recent years as firms seek to build relationships at an early stage. This can include relatives of current clients that have comparatively few assets now, but are likely to be much wealthier in future. “By the time clients become HNW or UHNW, they already have existing financial services relationships,” she adds.

Private equity has a key role to play in attracting new clients. “Access to private markets and alternative investments is becoming more important as traditional investing is becoming more commoditised,” Nanayakkara notes.

“We see firms establishing partnerships with a greater number of PE and [alternatives managers] to provide greater access.”

“Access to private markets and alternative investments is becoming more important as traditional investing is becoming more commoditised”
Nalika Nanayakkara,
EY

Although many within the industry see greater access as a natural progression and part of organic growth, regulators are nervous, Clare Gaskell, partner at Simpson Thacher, said at PEI’s Women in Private Markets Summit in December.

“The risk is that the more that retail investors, or less sophisticated investors, are targeted and able to invest… you end up almost with a convergence between the public and private markets,” she said. “Clearly, the less experienced people are, the harder it will be for them to assess risk.”

And this is just one of the dangers that critics have identified. External shocks, such as market fluctuations (or, indeed, a global pandemic), historically have their own impact on vast pools of wealth – although, Cambridge’s Ivey notes, this is again dependant on the type of client. “We re-run different scenarios and show [our clients] what could happen to them if we have another financial crisis,” he says. Being on the institutional side of private wealth investment, “our clients are aware of and understand market volatility and are taking a long-term approach, so the greater risk for them is the absolute risk of loss of capital”.

Private equity is an inherently risky asset class – something firms and advisers alike have a responsibility to ensure their private wealth clients understand. Still, if accessed correctly, private wealth offers a rapidly expanding and potentially lucrative source of capital for an industry that may wish to reduce its reliance on overallocated institutions.

“It’s an exciting time to be in the alternatives business in private wealth,” Solotar says, “towards the beginning of what I think will be a very long growth trajectory.”