Wealth management in 2021: The push for private markets continues

The second of our mid-year reflections on the wealth management sector (you can read the first here) takes a look at the growing importance of private markets to wealth management clients. 

Based on the findings of EY’s 2021 Global Wealth Research Report and our own conversations with wealth managers across the globe, we explore how the behaviour and attitudes of wealthy individuals are going through a period of significant transition, particularly around the topics of wealth allocation and impact investing. 

Delio’s team of private markets experts have delved into the report findings to explore how wealth managers will need to adapt their strategies to meet clients’ changing expectations. 

Clients look to portfolio diversification for post-pandemic growth

Given the volatility of global markets over the last 18 months, investors are increasingly seeking to allocate their wealth to a wider range of asset classes as the economy recovers. According to EY’s research, 42% of wealth management clients want to diversify their investments from traditional asset classes, up from 37% in 2019. More specifically, they are looking to allocate a significantly higher proportion of their portfolio to private markets; currently, 1 in 3 clients have some form of alternative investments, which is projected to increase to 48% by 2024.

David Newman, chief commercial officer at Delio, is not surprised by these findings. “There’s little doubt that private markets have been growing in popularity in recent years. At the same time, the Covid pandemic highlighted the volatility of public markets in a way that some investors hadn’t experienced before. And while many stocks have recovered since the summer of 2020, some sectors remain significantly down on their pre-pandemic peaks; this inherent volatility was not echoed in private markets.

“As a result, investors are more encouraged to diversify their portfolio than ever before. Once clients have considered the ever-present factors of performance and fees, the breadth of investment proposition that a wealth manager can offer is now one of the most important differentiators they will consider when appointing an adviser. In fact, Delio research highlighted that as many as 1 in 4 wealth managers had lost clients because they did not offer illiquid investments.” 

The report highlights interesting differences in how demographic groups view the role of private markets in their portfolio. Despite millennials taking an increasingly risk averse approach to most financial matters, appetite for alternatives is growing particularly quickly among this demographic. While unlisted investments are typically considered as higher risk than their publicly listed counterparts, this finding does perhaps support the suspicion that private markets are now considered as a more mainstream investment option than ever before. A more pessimistic view is that younger investors do not fully appreciate the risk considerations that they need to be aware of when it comes to alternative investments. This in itself poses a regulatory challenge that wealth managers will need to consider carefully as part of their advice process. 

However, as private markets become an increasingly important part of a wealth manager’s client offering, there is evidence that wealthy clients are demonstrating a greater understanding of how alternative investments offer them a longer-term solution that also meets their portfolio diversification targets. The high profile emergence of crypto and digital assets are also highlighted as a catalyst for this increased interest, particularly for Swiss and Asian clients. 

David Newman believes that investors are now looking to build increasingly diverse portfolios. “There has been a tremendous shift in the way clients are approaching their investments. Diversification has become even more important than before and has taken on a wider meaning. It is no longer simply a case of considering the diversification of asset classes, but also diversification within asset classes. Private markets used to be about accessing the latest KKR, Blackstone or Carlyle Fund but today’s investors are allocating to all spectrums of private markets; from early stage ventures, bridging finance and direct commercial real estate assets, through to the name branded funds. In many cases, there is also an emotional role at play too as investors want to have more affinity for their assets, not to mention the growing role of investments that offer some form of return beyond purely capital growth.”  

This increased appetite for private markets isn’t limited to the UK or the US; it’s happening on a global scale. In fact, the biggest acceleration of client uptake is predicted to be seen in Asia where 61% of clients are projected to have alternative investments by 2024 compared to 37% currently, followed by Europe (37% increasing to 54%) and the Middle East (55% increasing to 71%). As the globalisation of wealth management emerges as a defining theme for the sector, the demand for alternative investments also appears to be a worldwide trend. The challenge for wealth managers now is  how – not when – they adapt their strategy and operations to serve clients that are more mobile than ever before.

Investing for returns… financially and socially

The growing demand for ‘impact investments’ – the process of investing in projects that offer some form of social or environmental benefit – has emerged and accelerated at great pace in recent years. The EY report reflects this sentiment, with 78% of wealth management clients stating that they now have goals related to sustainability. It was also interesting to note that a quarter of millennial clients view sustainable investment propositions as the most important factor when selecting a new wealth manager.

The industry’s wealthiest clients are also placing more prominence on ESG (environmental, social and governance) concerns than any other demographic group. For example, 46% of ultra-high net worth clients said that climate change had climbed their agenda. This suggests that there is the potential for a significant reallocation of investments in the coming years; 76% of clients said that they believe it is important to integrate ESG parameters into their portfolios. 

Overall, impact investments are projected to grow by 15% in the next three years. This would mean that wealthy clients are, on average, allocating 35% of their portfolio to these projects, with adoption rates exceeding 50% among ultra-wealthy investors, millennials and Asia-Pacific clients. Newman believes that a wider societal shift will mean that interest in ‘impact projects’ will continue to accelerate.

“Investing for societal or environmental impact has been a hot topic for several years now, but it feels like there has been a momentum shift that has catapulted  it from a niche interest into the mainstream consciousness. The significant media coverage of important matters such as climate change and societal equality means that potential investors are now able to access information on topics much more readily than before. This is focusing their attention on how to use their wealth to fund organisations or projects that are going to make a difference to the world we live in, without sacrificing financial returns.

For wealth managers, this is a hugely important shift in investor sentiment that they need to respond to empathetically, but also practically. This will be particularly important in respect of building and developing the next generation of their client base, for whom investing for impact is likely to be a core interest.”

For more information on how your wealth management firm can respond to the growing demand for private markets, read our case study on how Delio’s technology transformed the way in which ING distributes alternative investment opportunities to their clients.