Wealth managers make up a tiny portion of the secondary private equity markets, but they’re making their voices heard.
Financial advisors are increasingly helping wealthy families give investments as gifts, according to NYPPEX Private Markets, a New York-based private equity transfer administrator, and the movement is having an impact on private equity secondary markets.
In its 2017 midyear report, NYPPEX says that it observed more donors making non-cash gifts, and more non-profit organizations accepting such gifts and selling them via its platform.
“In the past five years, there’s been a trend where more gifts are being made in non-cash form, but now this is going a step further into the private equity markets,” says Laurence Allen, managing member of NYPPEX. “We’re seeing a lot of this behind the scenes.”
NYPPEX says the trend is being driven by the growth of holistic wealth management and by clients seeking tax benefits and flexibility in their philanthropic initiatives.
During the second half of 2017, NYPPEX is recommending that wealth managers who handle alternative investments take steps to facilitate gifts and transfers of private equity assets on behalf of their clients.
Whereas the private equity industry has traditionally looked toward wealth managers as a potential sales force for limited partnership or direct offerings, today’s individual private equity buyers have an advantage when investing with an advisor, says Allen.
“Private wealth advisors, especially a multi-family office or RIA, are more proactive with the way they’re handling these investments,” says Allen. “Let’s say an investor is two years into one of these investments and a key partner dies. The client might not feel comfortable being a part of the partnership anymore, but they can turn to the advisor for guidance.”
Allen says that the secondary private equity market should be attractive to the wealth management industry because of the cyclical nature of private investments.
Funds tend to go through a growth period of one to five years, during which they accumulate assets and the general partners make investments and call capital back, but the end investor receives little or no return. After the growth period, there’s typically a one-to-five-year harvesting period where the investor receives cash distributions. On the secondary market, private clients can access limited partnerships close to or at the harvesting period and avoid waiting while the fund is grown and invested.