Private market firms are increasingly diversifying their sources of capital, and ultra-high-net-worth investors, who often invest through family offices, are becoming a significant part of the market.
Ultra-high-net-worth individuals aren't like other retail investors. They have the capacity to write larger cheques than high-net worth individuals, and have a greater risk appetite when compared with other limited partners like pension plans, KKR found in a research piece released on Wednesday.
The piece, The Ultra High-Net Worth Investor: Coming of Age, is based on survey conducted by KKR and interviews with more than 50 KKR ultra high-net worth investors.
KKR found that there are some specific traits that characterise that group of investors. It defines the ultra-high-net-worth individual as an investor with $30 million or more in investable assets. Most of these investors typically operate in a formalised family office format, with an average net worth well above the $1 billion mark.
The average ultra-high-net-worth investor typically has 46 percent of his or her assets in alternatives, compared to 24 percent for the typical global pension plan and 22 percent for the typical high-net-worth individual, who has $10 million to $30 million in investable assets, according to the survey.
Within the alternative asset class, KKR found that 52 percent of ultra-high-net-worth investors' assets are in private equity, 25 percent in hedge funds and 23 percent in real assets, with a notable skew towards real estate.
“Ultra HNW clients were often early to embrace capital markets dislocation, more aggressively deploying capital than many folks during periodic shocks,” Henry McVey, KKR's head of global macro and asset allocation, and Jim Burns, KKR's head of the individual investor business, wrote in the report.
“The CIOs for our ultra HNW clients we interviewed were early to take advantage of a shifting landscape in the banking system, deploying billions of dollars into areas such as private credit and asset-based lending when traditional financial intermediaries backed away.”
They added that given the long duration of their liabilities and minimal payout commitments, these types of investors have taken advantage of the illiquidity premium in areas like private credit and private equity to earn strong absolute returns in recent years.
McVey and Burns also warned that ultra-high-net-worth individuals could be in for some rough waters when the economic cycle turns. They estimate that the return for ultra high-net worth investors' portfolios could fall to 5.3 percent from a current 9.3 percent, unless portfolios are repositioned for the choppier market environment KKR expects soon. Going forward, manager selection will matter greatly, particularly in the alternative asset class.