[There are a number of forces at work that are drastically altering the private investment markets landscape.
First, there is a growing mindset change and new rallying cry for startup firm leaders to stay private longer (SPL) versus rushing to obtain funding and growth through the traditional initial public offering (IPO) route. Case in point, between 1980-2000 there were 6,500 IPOs but that has fallen to less than 3,000 from 2001-2022. The median age of a company going public in 1980 was six years but has nearly doubled to eleven years in 2021. A quick review of Uber highlights some of the issues at play where early private investors captured the firm’s meteoric growth and realized substantial returns versus public investors through Uber’s (UBER) IPO. These trends clearly point to SPL becoming the new IPO. – This is leading to growing supply and commitment to the private markets funding vehicle and asset class.
Second, at the recent May 2022 Morningstar conference, a survey of advisors was conducted reporting that 80% believe that retail investors should have more access to alternative investments and that 76% feel the traditional 60/40 portfolio is ineffective or less effective in today’s economic climate. This comes from the realization that many private investments are uncorrelated to the public markets and are a good source of further diversification. - This is feeding the growing demand of the asset class.
Third, acting as a catalyst for these changes, advisors today have newly expanded access to private market investments through digital, online investment platforms with superior research capabilities plus lower fees and minimums than could be found previously. - These platforms offer advisors quick and easy ways to make a direct subscription to private funds for their clients, reducing a huge point of friction in the marketplace through technology.
To dig deeper and better understand the changes happening in the private markets arena, we reached out to Institute Member Anshuman Mehta, Chief Product Officer (Private Markets) of TIFIN Wealth – an AI-powered fintech company that leverages data science, investment intelligence, and technology to help deliver engaging and personalized investor experiences. The time seems to be now where democratizing access and the reduction of friction points in the private markets can transform private investments.]
Hortz: How are you addressing some of the industry challenges within private markets?
Mehta: Across all the solutions at TIFIN, our mission is to make investing a more powerful driver of financial wellbeing. We deliver engaging experiences through powerful investment-intelligence driven personalization, making the advisor the center of conversations across an investor’s financial profile.
Entering the private markets made sense as it’s an area where 81% of ultra-high-net-worth investors are already invested. With total alternative investment AUM projected to reach $17.2 trillion in 2025, it didn’t make sense that a broader swath of investors could not access these investments.
We sought to increase adoption of this asset class in client portfolios by providing advisors with the tools necessary to analyze their client portfolios and generate intelligent recommendations, including what styles and private funds make sense for each investor. We believed adoption of private market investments in client portfolios will further increase, as advisors use our tools to personalize investment recommendations at scale.
Hortz: You say increase adoption, what does that mean?
Mehta: For too long, private market investments were only accessible to institutional investors with large analyst teams. Contrast that to the wealth channel that has traditionally under-invested in private market investments. Our goal is to make in-depth research and recommendation engines accessible to advisors so that they can have the confidence and information they require when providing their High-Net-Worth clients access to this key asset class.
Together with adoption, we are also solving the problem of access. We enable clients to place investments with lower minimums and reduced fees, driven by direct access to the underlying funds. Advisors are not paying access fees since we work directly with fund managers, so zero broker costs are passed on to the advisor.
Hortz: What do you see as key elements for a private markets solution?
Mehta: Intermediaries need a cloud-based platform to easily discover and select from a variety of carefully screened funds powered by AI-driven analytics. They can then generate recommendations for how much of a client’s portfolio should be allocated to private market investments by reading client data from their CRM tools and custodians. They can align a client’s private market investment styles with their traditional portfolio and evaluate specific investments in context of the client’s portfolio. Designing an end-to-end workflow solution, like ours, also assists with onboarding, investment and operational due-diligence, ongoing performance reporting, and more.
Hortz: What are some of the differentiators between the private market platforms available?
Mehta: While there are a few out there, where we think advisors should really consider their options is whether the interface is easy to use by supporting them every step of the way, the quality of analytics, and selection of funds available, plus whether the fees and minimums make sense for clients of varying sizes. That is where we would like to think we really stand out.
Hortz: How do you perform due diligence and select private investments on your platform?
Mehta: Our tenured research team selects each manager on the platform. We focus on providing access to independent, specialist investment managers with strong risk-adjusted returns and disciplined risk management. We seek differentiated investment strategies with established track records over full market cycles and which demonstrate a clear and consistent approach.
Each manager is additionally reviewed by an independent third-party research consultant. Manager evaluation by intermediaries using our platform is facilitated through custom insight on each manager, including firm overviews, track records, agency ratings, and access to reporting. We also offer an evolving content library, including whitepapers and market insights.
Hortz: Why is now the moment for private markets?
Mehta: Stock markets have been down and volatile. Interest rates have gone up, making an investor's existing fixed income portfolio decrease in value and highlighting that the fixed income side of a traditional 60/40 portfolio, which you thought was stable, is no longer so. Investors need additional means of generating returns, especially in non-correlated asset classes. Private markets that are less correlated to traditional markets and may offer longer-term outperformance potential could be the answer clients need.
There’s a contrarian view that when things are less than ideal in the markets – that’s the right entry point that makes the most sense. Valuations have come down, providing attractive entry points for private equity and venture funds. Rates have gone up, potentially pushing up investment returns in private credit funds. Further, through digital private market platforms, the barriers to entry for clients are significantly lower through highly reduced investment minimums, democratizing access to these once highly exclusive investments.
Hortz: Any recommendations or advice you can offer advisors looking to add more alternative and private market exposure to their clients’ portfolios?
Mehta: While Private Markets continue to grow, the number of advisors in the space has not yet caught up. Clients want the diversification and uncorrelated returns that these investments offer. We think that it makes sense for advisors to explore a tech solution to make their role in helping clients access private markets simple and scalable.
Advisors are busy and need tools to make adopting a new area less of a burden and more of a turnkey solution. Where companies like TIFIN Private Markets come in is we can empower advisors with education and research, an automated process, plus greater access through reduced minimums and fees so these investments are a reality for a variety of clients.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I wrote this article myself and I am not receiving compensation to write this article but I do have a business relationship with TIFIN which is an Institute member. The Institute is a business innovation platform and educational effort with financial services firms to openly share their unique perspectives and activities to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking.