The growth of private markets and alternative assets: what it means for wealth management

Alternative assets continue to generate significant interest amongst private investors, yet despite this, not all wealth managers have moved to make private markets a mainstream element of their client offering; could 2022 be the year in which this changes?

David Newman, Delio’s chief commercial officer and co-founder, explored the ‘what, why and how’ of private markets for wealth managers at Octopus Investments’ recent breakfast briefing and explained how offering their clients access to these assets was fast becoming an essential, rather than optional, part of their strategy.

The challenges facing wealth managers

The wealth management landscape is an increasingly competitive one. As a result, firms are having to work harder to differentiate their offering, retain clients, and win new business. This challenge is underpinned by three key factors:

• Relevancy: How do wealth managers ensure that their services stand out in an increasingly busy market?
• Performance: How can they deliver returns in line with increasingly ambitious client expectations?
• Differentiation: Are they offering innovative services or delivering these in a unique way?  

One of the answers to all three of these questions is by incorporating private markets into their client offering. Delio research has highlighted that 69% of wealth management clients are increasingly seeking access to illiquid investments. This ticks the relevancy box straightaway. Meanwhile, the performance of private assets has outstripped their public counterparts eight-fold over the last 20 years, which is just one of the reasons why so many more clients are now seeking ways of accessing them. Finally, while private markets are fast becoming a core part of wealth managers’ offerings, there remains a sizable number of firms who have yet to adapt their proposition accordingly; as a result, firms who have taken action immediately possess a USP over many of their competitors. 

Why are alternative assets generating so much interest?

Private markets’ ability to outperform more traditional investments over prolonged periods has been a driving force behind this trend. While public markets have been subject to significant volatility in recent decades (linked to the financial crisis of 2008 and the more recent Covid-related crash in 2020), the longer-term outlook associated with alternative assets means that the impact of any immediate depreciation is often mitigated. 

As wealth management clients seek to proactively diversify their investment portfolios, the longer-term growth offered by private markets offers an attractive option for many investors. Research carried out by EY highlights that the number of clients allocating capital to these assets is only moving in one direction: 33% of wealth management clients currently invest in alternatives, but this is projected to grow to 48% within the next two years. This trend is accelerating even faster with younger clients: 60% of millennials and generation X-ers are expected to invest in alternative assets by 2024, up from 32% currently.

This startling projected growth is a clear demonstration of why wealth managers need to act now to incorporate private markets into their client proposition. A failure to do so is likely to see them lose significant ground against their competition, which in turn could result in the longer term risk of clients moving other assets under management to firms who can offer a more holistic wealth management service. 

So why aren’t all wealth managers offering access to private markets?

Given that market drivers are combining to create a ‘perfect storm’ for private markets, it’s perhaps surprising that all wealth managers haven’t acted immediately to take advantage of this movement. In fact, of the wealth managers represented at Octopus Investment’s breakfast briefing, only half reported that they were actively offering their clients access to alternative markets. A further 29% said that they were in the process of creating their private markets proposition, while 21% reported that they were unlikely to offer access in the immediate future.

So, why is this? In simple terms, designing a scalable, compliant private markets proposition isn’t a simple task. Typically, firms cite three main challenges that either create barriers that need to be overcome or potentially prevent them from entering the market whatsoever.

• Operational challenges: Offering clients access to private markets is typically seen as highly resource intensive, with commercial strategy based around a ‘black book’ culture of client management that is challenging to scale.
• Regulatory complexity: Private markets are not for every client; investor profiling, proposition governance and compliant deal distribution are all factors that need to be considered and managed effectively to mitigate the risk of non-compliance.
• Scaling a proposition to become profitable: The operational inefficiencies mentioned above mean that many firms struggle to find a way of opening up access to enough of their client base for private markets to be a sustainable competitive advantage.

Digitisation is one of the key strategies used by wealth managers that have successfully been able to overcome these challenges. As a result of the pandemic, 86% of firms report that they have accelerated their digital strategies. One of the most obvious reasons for this is that technology allows them to streamline client access to alternative assets while delivering more robust operational governance. 

Is 2022 the year that private markets become a mainstream product?

Given the momentum behind private markets, it appears that alternative assets are rapidly becoming established as key components of a balanced investment portfolio. Speaking at the event, David Newman explained that his conversations with wealth managers across the UK and Europe led him to believe that only a small minority of firms would end the year without some form of private markets offering.

“4 out of 5 wealth managers tell us that they offer their clients access to private markets or are working towards a strategy to do so”, he said. “This highlights that alternative investment opportunities are no longer a ‘nice to have’ element of a wealth management strategy – it needs to be a central part of your client proposition.”

Thank you to Octopus Investments and Owen James events for inviting us to present at the event.