Delio roundtable: Collaboration in private markets – a realistic ambition or impossible to achieve?

Delio roundtable: Collaboration in private markets – a realistic ambition or impossible to achieve?

David Newman 4th November 2021 David Newman, Co-Founder and Chief Commericla Officer, Delio

As part of our ongoing series of roundtable discussions, Delio recently brought together representatives from some of the world’s largest banks and financial institutions to discuss the topic of collaboration in private markets.

Given the complexities financial institutions face when sharing data between one another, not to mention the commercial sensitivities when dealing with firms who could potentially be a competitor, is true collaboration nothing more than an idealistic ambition? While the group certainly agreed that there are barriers to overcome, it does appear that firms can see clear benefits of forming strategic partnerships – some of which are already in place.

Do private banks genuinely have an appetite to make collaboration in private markets work?

Collaboration between financial institutions is often talked about in glowing terms; the pooling of resources, combining collective expertise, delivering even more value to clients through strategic partnerships. However, in reality it can be hugely challenging to achieve due to regulatory and commercial constraints.

Given that many of our guests were representing global organisations, we kicked off the discussion by asking whether there was a genuine appetite to collaborate on private markets projects. Perhaps surprisingly, the answer was a unanimous ‘yes’. While nearly all participants acknowledged that this was far from a simple process, there was also full agreement that collaboration, if managed well, offered significant benefits for firms and their clients.

Several participants said that they actively seek to work collaboratively with other firms, which is one of the main ways they can offer a more diverse range of investment opportunities to their clients. One member of the group said that their key objective “was all about creating access for clients to dealflow”, which meant that they would often work with other partners in order to be able to offer access to a wider range of asset classes.

Another contributor argued that collaboration was entirely possible but that it “relies on close alignment with your chosen partners”. However, he felt that approach was worth the effort given that it “improves distribution channels, which in turn should increase the value of deals and the quality of dealflow.” Taking a slightly different perspective, one group member said that they saw significant risks in not collaborating with other firms.

This is a marked contrast from the views of only a few years ago when most leading wealth managers were very closed to the prospect of collaborating in private markets. Data gathered as part of Delio’s research report “Private Markets in Wealth Management” in 2019, highlighted that many wealth managers saw their services as unique and a significant differentiating factor; as a result, they were much less willing at that point in time to support the notion of a collaborative and open partnership with other firms.

How are firms collaborating on private markets deals?

Of the firms represented at the event, more than 80% said that they were actively involved in private markets. Those that weren’t said that they were currently in the process of developing their propositions for launch during 2022. There was little doubt amongst the group that client demand for alternative asset classes had increased significantly in recent years; the only firm to caveat this view was the representative of a financial institution based in Australia. They said that they were still going through an ‘educational process’ with investors to help them become more comfortable with private markets; they went on to say that the maturity of private markets in the southern hemisphere was probably 3-5 years behind Europe, but that client demand was expected to follow the same trend that had been seen elsewhere over the next few years.

Nearly all of the active firms said that they were using a co-investment strategy as part of their approach to private markets. The general view was that this type of collaboration offered significant benefits for institutions, particularly those that are in the earlier stages of developing their proposition. On a similar note, several representatives said that they used sub-distributors to widen the potential audience for deals and that this approach was helpful in raising funds where the full target was unlikely to be raised exclusively from their own client base.

Interestingly, several of the institutions said that they were also working together to distribute private markets opportunities on a territorial basis. While many of those represented work with clients on an international basis, naturally their client bases are sometimes more mature in certain territories than others. In these instances, at least three of the firms said that they had collaborated with ‘competitors’ on a territory specific basis – for example, one institution would have exclusive distribution rights for a deal in Europe, with another firm promoting the deal to their clients across Asia.

What are the barriers to collaboration?

All of the firms represented at the event shared a realistic approach to collaboration; while it was encouraged and seen as hugely beneficial, there are undoubtedly operational barriers that need to be overcome for the approach to work effectively.

Differing approaches to timelines and operational processes were flagged as one of the main blockers that firms faced when working with a partner. One member commented that “a shared understanding of how each party works is essential for a collaborative approach.” Another contributor agreed, sharing his experience of where a contact approached him regarding the potential for working together but with a two week deadline for completing all necessary regulatory and operational agreements. He said that as a relatively small part of a multinational financial institution, these timelines were simply impossible to achieve due to their own internal due diligence protocols. One member of the group commented that it was vital for firms to have their collaborative arrangements in place ahead of time, given that good private markets investment opportunities typically require action to be taken quickly.

Due diligence processes were flagged as another potential challenge to overcome. All firms agreed that they would also not be able to rely on an external party’s due diligence to satisfy their own internal requirements. However, one of the firms did say that they had experience of working with another firm’s team to take a more collaborative approach to their due diligence requirements which had actually saved time and effort. However, they agreed that these arrangements needed to be agreed in advance, rather than on an ad-hoc basis.

So, can collaboration work in private markets?

There seems little doubt that a collaborative approach does offer many benefits for financial institutions that wish to scale their private markets offering. And while there are challenges that need to be addressed with this approach, there appears to be enough support to overcome these.

Delio is privileged to play a small (but hopefully important) role in helping to connect the wider ecosystem of investors and financial institutions. We look forward to our technology helping to drive collaboration across private markets while supporting wealth managers and private banks in their efforts to broaden access for clients.

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