Delio Virtual Round-Table Discussion: Private markets in discretionary portfolios
Earlier this summer, Delio hosted an exclusive ‘virtual’ event to bring together key industry practitioners from across the private markets space. The round-table featured representatives from a diverse range of institutions, including leading European banks, wealth managers and multi-family offices. This diverse and highly experienced forum focussed their discussions on a key emerging theme: can private markets play a role in discretionary portfolios?
During the event, discussions covered a variety of topics including what drivers are behind a potential increase of illiquid investments in discretionary mandates, what the most significant challenges are to ingraining private markets within discretionary mandates and what solutions are being explored to solve those challenges. Read on for a high-level overview of the key points shared and discussed.
Is an increase of illiquid investments in discretionary mandates expected, and what are the drivers?
Unquestionably there is a trend for illiquid investments to play a greater role in private client portfolios. All participants have expanded, or are expanding their advisory private market offerings and this has also been seen more broadly across the industry. There was significantly more debate among the audience, however, around the extent to which there will be a corresponding increase in their use in discretionary mandates.
Whilst it was clear that many attendees believe illiquid investments should play a greater role in discretionary mandates (and with most agreeing the client demand is there to drive it) surprisingly few actually believe that there should be an expected increase in the immediate future. Operational challenges and lack of standardised frameworks (both internal and regulatory harmonisation) mean that few see a flood of new propositions.
However, despite the consensus that illiquid investments are unlikely to start playing a significant role in discretionary mandates anytime soon, it was agreed that the shifting change in investor attitude is increasing demand for access to private markets and investments that require a more long-term view of return.
Our delegates concluded that this behaviour is being driven by an economic environment in which expected returns from more traditional investment strategies are decreasing by the day, combined with the volatility of the public stock market. It was agreed that investors are looking for a more stable environment in addition to wanting to access opportunities that are not always in the public domain. As a result, an increased allocation to private equity is providing the portfolio diversification that many investors are seeking. With the broader industry trend towards standardised offerings and a perceived need for scale in private markets it will only be a matter of time before this translates to growth in illiquid investments in discretionary mandates.
What are the biggest challenges to ingraining private markets within discretionary mandates?
It was conclusively agreed that one of the biggest hurdles is an internal one, with a need to alter the attitudes and improve the knowledge of Relationship Managers being one of the greatest challenges. For decades, Relationship Managers have been recommending public markets as the core of a portfolio strategy due to both the likelihood of good returns that can be achieved, while also avoiding the high risks typically associated with illiquid private equity investments. However, a combination of a volatile economic climate and diminishing returns is beginning to result in a change of perspective.
The forum believed that this somewhat negative mindset towards private equity has been ingrained in the minds of many Relationship Managers, with alternative assets commonly being viewed as risky and complicated. Not all Relationship Managers are experienced in private equity, so this can translate into a situation whereby they shy away from the topic unless there’s a direct request made to them by a client. Therefore, the main challenge comes from the need to retrain and reeducate individuals on the value that they can potentially add as part of a diversified portfolio. There is a wide variation between firms (and often within firms) of the enthusiasm and capacity of the advisors, but it was consistently agreed that this is one of the single biggest challenges needed to overcome in order to grow private market offerings generally.
Alongside banker education, broader internal challenges also shone through. The need to appropriately document clients, re-paper existing mandates and provide clients with the requisite transparency is something those that have successfully ingrained private markets in discretionary mandates have had to overcome. From an investment perspective, how you handle, and subsequently report on, target allocation was a barrier that attendees also flagged.
What solutions are being explored to solve challenges?
When it comes to overcoming a shift in the attitude of internal stakeholders, the firms that have seen most success have put in place comprehensive, bespoke training programmes. It was widely acknowledged that this should enable teams to generate a better understanding of the intricacies of private equity. When performed by external specialists and structured into a regular ongoing programme of education with local champions/ambassadors it has had the most success in creating organisational mindset changes.
Just as importantly, however, it came through in our discussions that the positioning of private equity as an enabler, not just from a return perspective, was crucial. Articulately conveying to internal stakeholders how private equity should be considered a vital tool for both client acquisition and retention.
When it comes to solving the more operational issues, there was no clear consensus from the audience. Each firm will take a different approach to managing target private equity allocation and how to fund capital calls. Similarly there was a range of views on how to document and paper clients, with some firms preferring separate private markets mandates, with others believing a simple re-papering of high risk mandates to allow for a small allocation to illiquids was the way forward. Others are optimistic about their capacity to build a range of mandates with varying levels of private markets exposure.
Whilst everyone may be approaching their solutions differently, one of the critical realisations to emerge from the discussion was the fact that despite the delegates representing a diverse range of organisations, these common challenges were shared across their businesses. This suggests that despite operating in a truly international marketplace, financial institutions would benefit from coming together and sharing both their concerns and solutions in order to solve the broader issue and to facilitate growth for each other in this space as common frameworks and standards can also help unlock future growth.
We will continue to help convene our network to play a role in that evolution.
Are you interested in taking part in one of our next virtual roundtable discussions? Get in touch with us, and we’d be more than happy to take the conversation further!