In today’s fast-paced investment landscape, advisers face the daunting task of adapting to changing market dynamics while seeking new avenues for generating alpha. The traditional investment playbook — comprising a mix of stocks, bonds and cash — was considered reasonably reliable until the model’s steep, negative returns in 2022. Subsequently, advisers are exploring private market investments as a fresh approach to augment client portfolios and remain ahead of the curve.
Private market investments, heralded for their potential to deliver attractive returns and diversification benefits, have become highly coveted. However, gaining access to these opportunities is no easy task. The landscape is replete with complexities such as limited access, high investment minimums, nuanced strategies, regulatory complexities and opacity, to name a few. In navigating these challenges, the expertise and resources of institutional players play a vital role.
Institutional teams, with years of experience and specialized knowledge, typically possess the insights to assess risk, evaluate opportunities and construct robust portfolios. Their expertise, networks and due diligence capabilities can help advisers make informed investment decisions, enhancing the likelihood of success in this complex environment. To differentiate their practice from competitors and meet the evolving needs of sophisticated clients, savvy financial advisers recognize the growing importance of collaborating with deeply experienced institutional partners to access private markets.
Adviser education and due diligence are critical
Given the aforementioned complexities of private market investments, advisers must look beyond vehicle performance and thoroughly vet managers before presenting opportunities to clients. They can alleviate the due diligence burden by engaging an institutional team with deep roots in alternative investments. This specialized team assumes the responsibility of analyzing and monitoring critical elements, such as alignment of interest, team makeup, process consistency, risk management systems, the firm’s asset base and the client profile.
It is incumbent upon the adviser to understand the “why” or rationale for investing in alternatives. Diversifying away from traditional markets without a clear investment strategy, a well-defined purpose and a thorough understanding of any associated risks is a fool’s errand. Advisers should be able to clearly communicate the expected outcome and performance of a specific investment in the current environment, as well as its role in the client's portfolio.
Advisers should also pay particular attention to the varying fee structures of alternative investments, including preferred returns, waterfall fee structures and performance-based incentive fees, ensuring that fund terms are in line with prevailing industry standards. By carefully examining and comparing the fee structures of alternative investments, advisers can help their clients make more informed investment decisions and remain compliant with any relevant regulations.
Further, advisers face time constraints when it comes to conducting extensive research, comprehensive analysis and rigorous evaluation, which are essential for thorough opportunity vetting. Institutional players typically have a well-established due diligence process, sophisticated risk management frameworks and dedicated teams focused on each of these aspects, enabling them to best identify high-quality opportunities and minimize potential risks. By offloading these evaluations, advisers can prioritize all-important client service.
The many benefits of institutional access
An institutional team with expertise in and access to private investments can offer advisers and their clients several distinct advantages versus going it alone or relying on alternative platform providers, which often offer cookie-cutter solutions.
Among the most critical is unbiased and enhanced access to deals and investments that institutional teams have diligently cultivated over decades. These partners have well-established, trusted networks and relationships within the private investment landscape. In some cases, opportunities may arise for exclusive investments that are not available through alts platforms. These may include niche real estate deals, direct private equity deals or co-investment opportunities that can’t be found elsewhere.
Another key benefit of leaning on an institutional partner is the ability to leverage negotiating power. With their deep understanding and expertise in evaluating and structuring private investments, institutions can use their reputation, scale and experience to secure favorable terms and conditions, including crucial fee arrangements. Additionally, institutions can potentially improve an investment's risk/reward profile, which can be particularly valuable in more competitive environments.
Finally, institutional teams are equipped with dedicated resources that transcend the due diligence process. They can lean on seasoned research professionals, institutional-level deal flow and even specialized data. Drawing upon consulting guidance, niche research reports or even market intelligence can provide exclusive insights, further informing an adviser’s investment strategies and benefiting the end client.
Changing market dynamics necessitate private market diversification
A bevy of market prognosticators and industry experts believe that traditional, public market portfolios will bounce back from a historically poor year in 2022. However, it doesn’t alter the likelihood that private market investments will continue to increase in popularity due to changing market dynamics and the opportunity for diversification away from equities, bonds and cash.
By engaging with experienced institutional teams with deep networks and exclusive relationships, advisers can expand clients’ access to a realm historically reserved for institutional investors such as endowments. These enhanced capabilities and opportunities enable advisers to stand out from the competition, enhance portfolio diversification, potentially mitigate risk and unlock unique avenues for wealth creation.
Forward-thinking advisers recognize that alternative investments are not just a passing fad but an essential tool when building resilient portfolios. By forging strong alliances with institutional teams and remaining attuned to the ever-evolving investment landscape, these financial professionals are ultimately better positioned to serve their wealthy clients’ needs.