High-net-worth individuals eye direct investing

Beyond continued interest in traditional PE funds, high-net-worth individuals are increasingly seeking access to direct investments alongside GPs, says Lawrence Calcano, CEO of iCapital Network.

High-net-worth individuals are increasingly interested in direct and co-investing, according to Lawrence Calcano, chief executive officer of iCapital Network, who added that he expects to roll out a direct investing platform to meet that demand next year.

High-net-worth individuals are still focusing predominantly on buyout, growth, distressed debt and credit strategies for their 2017 alternative asset investments, Calcano said. These were already some of the most popular strategies in 2016. iCapital connects high-net-worth individuals and their advisors to alternative investment managers.

“Buyout and growth are attractive due to the prospect of higher returns in comparison with public equities over five, 10, 15, 20 years,” Calcano told Private Equity International. “The returns and the access to a larger set of opportunities is the rationale for the interest in those strategies.” 

Distressed debt funds are also attractive going into the new year because investors are currently uncertain about the economic cycle, and want exposure to fund managers who can take advantage of any market dislocation and invest opportunistically around that, Calcano said. Credit, meanwhile, provides investors with incremental returns on their investment with shorter duration – a sound strategy for particularly uncertain times.

Like institutional investors, high-net-worth individuals are also trying to lower their costs related to management fees and carried interest, and as a result, demand for direct investing as co-investors alongside general partners is expected to pick up next year. With direct co-investing, they are also able to pursue specific opportunities they find attractive that may not be available in a traditional blind-pool fund – and with lower fees.

Overall, more high-net-worth individuals have been putting private equity into their investment portfolios for diversification and returns.

“We’re seeing it every day from advisors [to high-net-worth investors] and investors themselves making their first allocation to private equity through some of our vehicles,” he said. “We are seeing a lot of folks who historically had shied away from the asset class now stepping into it.”

In iCapital’s June survey, almost seven in 10, or 68 percent, of high-net-worth investment advisors who weren’t offering private equity said their clients want to access the asset class.

Although there are initial barriers to entry, such as a minimum amount of commitments accepted by traditional private equity funds, Calcano expects access by the high-net-worth pool to increase in the coming years.

“GPs are interested in the high-net-worth space because their traditional investor base of pension funds isn’t growing,” he said. “Going out to high-net-worth investors, which is a growing marketplace, is important for expanding their investor base and, in turn, for better fundraising prospects.”