Many investors are beginning to recognize that what got them here—namely, equity risk—may not be what brings them forward.
Let’s say you were completely unburdened by and unanchored to portfolios you built in the past, and there were new tools to help you build more intentional and controllable outcomes for your clients. Would you go about it the same way you did 30 years ago? Likely not. You’d use an expanded toolkit.
Expanding the toolkit to enhance outcomes and experience
Private markets are part of that expanded toolkit. Their existence is not new. In fact, much of private markets investing more closely resembles what finance looked like at its origins: helping good businesses become great through true earnings growth financed with direct loans. The use of private markets in portfolios to meaningfully enhance outcomes is also not new. These strategies have been in use in institutional portfolios for decades.
What is new, then? First, availability. New tools are great if you can afford to own them, but it’s a moot point if you can’t. Evolved structures made private markets accessible to a broader universe. An expanded definition of investor suitability and qualifications (accredited or below)—coupled with better liquidity (quarterly, monthly), investor-friendly reporting (1099s) and operational integration—made these solutions a viable option for inclusion in more portfolios.
Investor-friendly structures are expanding the opportunity set for financial advisors1,2
| Considerations | Qualified Purchaser | Qualified Client/Accredited Investor |
|---|---|---|
| Structure type | Finite-life | Perpetual life (evergreen) |
| Funding structure | Drawdown | Fully funded |
| Registration status | Unregistered | Registered |
| Minimum investment size | $5mm | 25k |
| Offering availability | Intermittent | Continuous |
| Tax reporting | K-1 | 1099 |
| Cash flow management | Advisor responsibility | Fund manager responsibility |
| Documentation/connectivity | Follow their own process (not integrated) | More integrated ("off the shelf") with simplied administration |
The second new development in private markets investing is ease of access. You’ll never use a tool if it’s cumbersome or delivers only a small marginal benefit. Evolution of both regulation and technology combine to create new channels of access by which to evaluate and select investment solutions. Electronic subscription documents, e-signatures and other conveniences all contribute to a more familiar and smooth experience. A perpetual offering means capital is deployed immediately, moving the practical burden of cash management from the advisor (outside the fund) to the asset manager (within the fund)—similar to public market commingled fund structures.
Finally: familiarity. A tool is no good if you don’t know what it’s for and how to use it. Yes, in many ways equity is equity, whether it exists in public or private form. And a loan is simply a loan, whether it’s originated at a bank or a private lender. But private market asset classes are fundamentally different in the way they seek to generate performance relative to their public market equivalents. The chart below demonstrates this point.3
A new approach to an old problem
What investors need is not wholesale new. They need a new approach to the same old problem they’ve been trying to solve since the dawn of time: funding the post-retirement lifestyle they desire in a relatively smooth, consistent way. We believe private markets can be a part of that new solution, particularly now that they are available in more accessible structures.
We acknowledge that to maximize the utility of these strategies, they need to be deployed in the right way. That means education on the asset classes and asset allocation, which we deliver via AccessAres.
