Expert: Adam Harrison, Titanbay joined by Nick Rosenblatt, Mercer. Facilitator: Gilly Green, Sionic
...to minimise the risks and costs a wealth manager incurs in offering private markets investing to their clients
- Access to private markets has been challenging for wealth managers
- Access to QUALITY managers almost impossible
- Regulatory suitability rules are a barrier, though there are signs of regulators in some countries opening up this asset class
- Managing the risk of default with a secondary “market” is a key requirement
Key Challenges, Conclusions and Solutions
Titanbay provides a platform that enables investors to access Private Markets funds – a market that has traditionally been closed off to the majority of investors due to high barriers to entry; extremely tight regulatory controls and significant administrative overheads.
This is a timely offering:
- Demand outstrips quality supply, and demand is growing, judging by increasing popularity with institutional clients
- Getting access to private markets has been a challenge even for UHNW clients in the past
Titanbay has created a technology platform and a feeder fund investment structure to remove the pain and barriers to access private markets funds. In collaboration with Mercer, the platform is able to leverage Mercer’s superior access to world-class GP’s and best ideas on private markets. They are able to offer something that has been typically out of reach of many wealth managers and their clients.
Today’s session focused on how leveraging platform and technology, along with expertise, means the risks and barriers to entry to this asset class can be mitigated.
Expert Adam Harrison positioned the challenges of investing in private markets – and then the following discussion was led by participant’s questions:
The crux of the discussion was around the challenges that wealth managers face in investing in these assets for their clients, and how by using a technology platform (alongside a feeder-fund structure), these can be solved. Whilst not a promotion of Titanbay and Mercer, per say, the participants were interested in understanding this as a case study in how these challenges are being solved.
Private Markets cover:
- Private equity
- Real estate
- private debt
Access to private markets for private clients is challenging, not least because of minimum investment requirements.
It is also noted that good managers prevail in this type of asset, showing persistency of performance. This, in itself, means that capacity vs demand of those favoured managers is limited, since they tend to have a ready client base of repeat investors.
There is no incentive for the Managers to solve these issues.
Access through a platform, into a feeder fund structure can provide solutions that are tuned to desired exposure (sleeves are by asset type and region, for example). By grouping private clients through this mechanism, it means that minimum investment requirements are much smaller and the manager receives scale and access to a diverse client base without the concern of administrative overhead.
In working with Mercer, Titanbay also solves the priority and access issues by leveraging the existing relationships that Mercer already has, and removes the need to create a pre-defined demand that needs to be sold on.
This approach levels the playing field for private banks and wealth managers and gives a new plethora of choice.
Private market assets require long-term commitment – 10 years is a typical timeline. Hence, good due diligence for these investments is important. The committed investment will be spread across that time and there will be distributions during the holding period, so it is not simply an ‘invest and hold’ scenario.
Not only are private markets notoriously difficult to access, there is a high risk of default by investors and there is little option in the way of a secondary market. Since default is statistically much less for institutional clients than private clients (who are subject to ‘life events’ than can change the ability to honour call commitments), this is yet another challenge that wealth managers need to overcome.
Using a technology platform brings a solution to the defaults issue – turning a potential default into ‘requirement to sell’, a market for them can be managed within groups of current investors. As an auction approach, this avoids being perceived as an exchange (though that may be considered later, and clearly comes along with a need for regulatory permissions and associated overheads).
Regulatory requirements for investor Suitability are another challenge for managers. There are different rules and processes in different jurisdictions, which are hard to understand and apply appropriately in all cases if you have an international business.
Suitability was a particular area of concern for participants.
By using a technology platform, the regulatory environment can be mapped to interpret the rules through logic for the jurisdiction of the investor on the basis of the individual’s details; and can manage the processes that the wealth manager needs to go through. Suitability tests can be coded to output a no, yes or refer during the onboarding process.
Investors with less than £50m are unlikely to pass Suitability today, but this is also a changing environment – 401k schemes are now eligible to invest in GPs – regulations are easing up in some areas and regions as regulators understand the need for fair client outcomes.
There is a macro shift of the economy from public to private (currently 10% of global AUM) and this transfer from traditional stocks will open up opportunities for private investors*. This growth is encouraging, but investors still need access to quality.
*Arguably private markets could offer better and more transparent ways than investing in regulated funds alongside institutional investors that have underlying liquidity risk (as per Woodford)
Of course, there are many other advantages of a good technology solution: - to support legal documentation and onboarding; as well as notoriously manual operational processes; and untimely data that leads to adjusted valuations and other reporting issues.
The benefits of a platform approach cover the needs of COO, Compliance, CRO, CTO and commercial considerations – and not simply those of the CIO’s desire for access to an attractive investment.