The Gatekeepers

Prince: Can you discuss the lockup periods?
Grove: Liquidity is probably the biggest hurdle remaining for many advisors and investors. It’s one of the reasons the qualified purchaser requirements are important, to make sure that the time horizon and the cash flow needs of the investors are consistent with the lockups. Most investment advisors built their careers in the public markets, so they’re comfortable with liquidity, and after the 2008 crisis there’s been an even greater emphasis on things like liquidity and transparency. But all investors don’t need 100% liquidity at all times, and some of them, especially wealthier individuals, are willing to earmark a minor percentage of their portfolio in exchange for uncorrelated and potentially much higher returns.

As an asset class, PE averages seven-year commitment periods. Recently, there’s been an increase in shorter-term lockup vehicles in the three- to five-year range in the credit and real estate sectors that retain many of the key performance attributes but also offer current and quarterly distributable yields. And I suspect we’ll see more variations on this in coming years.



Prince: What is the ideal portfolio allocation for private equity?
Grove: It really depends on the individual and his or her time horizon, risk tolerance, liquidity needs and overall investment strategy, but some guideposts can be helpful. According to Preqin, a leading provider of alternative assets data, pension funds have an average target allocation to PE of about 7%. Foundations and endowments often have a much higher PE allocation, somewhere in the 12% to 13% range, because their investment horizon is much longer. And there’s some evidence that smaller endowments are allocating at even higher levels than that.

At the same time, Preqin shows that family offices are directing close to 25% of their portfolios to private equity.  Our own research with single-family offices provides a bit of insight into that figure. Most keep their overall allocation below 20%, but there’s a small group that maintains much higher allocations to the asset class that help inflate the overall number.

Prince: You’re a well-known authority on family offices, which are often a harbinger for the investment advisory and wealth management industries. Can you provide some additional insights into family offices and their views on private equity?
Grove: Private equity is a key holding for a lot of single-family offices for a couple of reasons. Our research shows that about 60% of them are actively investing in private equity and slightly more than half of that group is planning to increase its allocation to PE this year (Figures 2 and 3). I’ve consulted to dozens of family offices over the years and most maintain a certain degree of flexibility that allows them to invest in the way that best suits the family members’ goals and interests. For many, that means the stock of a company that was sold or restructured to form the basis of their wealth creation. For others, it’s a direct investment in a local or family business. Still others invest in funds and funds-of-funds. And a significant cross section use more than one vehicle.

On that note, about seven out of 10 single-family offices say their private equity funds have outperformed other investments in their portfolio and eight out of 10 say their direct investments have outperformed. As a group, they’ve had success in the private equity arena and are eager to replicate it moving forward. That’s a big driver behind the increase in allocations and, because family offices network heavily with one another, probably a contributing factor to why the roughly 40% of single-family offices who aren’t currently investing in PE are planning to do so in 2015.

Prince: If an advisor wants to provide his or her clients with exposure to private equity, what’s the best way to start?
Grove: We think it starts with education, and that’s a major reason why I decided to join iCapital. The managing partners—Dan Vene, Nick Veronis and Lawrence Calcano—are seasoned veterans from different parts of the private equity industry who saw that complex and labor-intensive fund-raising methods could be simplified, streamlined and significantly enabled with technology. More importantly for this audience, they understood that members of the advisory community would still need access to high-quality information and intelligence to make the best decisions for their practices and their underlying clients. It’s an exceptional opportunity to blend my own experiences and relationships in the high-net-worth markets with the top-notch technological and diligence capabilities at iCapital to transform the way private capital is sourced and invested.

We are developing an extensive suite of educational resources and business development tools to help advisors fully leverage iCapital’s platform in ways that can benefit their existing clients, allow them to reach wealthier prospects and, ultimately, be more effective at the high end of the market. In the meantime, advisors can register with no obligation and explore the platform at www.icapitalnetwork.com.

Prince: Is there anything you’d like to say to the readers of Private Wealth as you depart the magazine and embark on this new endeavor?
Grove: It’s been a pleasure and a privilege writing for you since we launched the magazine in 2007. Working with ultra-affluent clients requires a unique skill set and demeanor that have become increasingly important as wealth creation has hit higher and higher levels around the globe, and watching that evolution occur in the industry at large and within the microsystems of individual professionals has been incredibly interesting and enriching. I wish each of you luck and success as you build and refine your high-net-worth practices.