While the affluent population has always invested in privately held firms, interest in the sector has surged in recent years, prompting a response from the financial community. The range of opportunities available to private investors is growing and includes direct investments, funds, angel groups and everything in between.
The appeal of private equity is also increasing among a number of wealthy sub-segments. Single-family offices are interested in “club deals” and participating in consortiums that help them access direct and co-investment opportunities alongside other families. They also rely on financial and legal professionals to source unique investment opportunities for them.
Younger generations are curious about private deals, too. In a recent survey of ultra-wealthy inheritors who expect to inherit $100 million or more, 22 percent are already doing deals and 65 percent plan to become more involved in buying and selling substantial assets.
Given these trends, it is not surprising that many financial advisors want to expand their capabilities to include private equity. The investment process and the client experience can all be somewhat different with private equity than it is with traditional public investments. A fund structure will probably make the most sense for advisory professionals who do not yet have a lot of experience with this asset class because it is a familiar vehicle and can often address the risk and diversification concerns associated with a more concentrated investment.
The other option for financial advisors is to facilitate direct investments in companies for their wealthy clients. This step, however, might be too bold for a number of advisory practitioners. Working with clients on direct investments in private companies takes technical skills and knowledge that most financial advisors and even some registered investment advisors don't possess. An understanding of deal structure and the multitude of legal issues involved are required.
Strategic relationships with investment banks can provide access to direct deals, of course, but must be structured in ways that assure roles, responsibilities and payment models are aligned to help the partnership succeed and avoid improprieties. It is also essential that advisors deliver the right degree and kind of information to their wealthy clients, especially those who are exploring private investments for the first time and may have a different set of expectations.
Many high-end financial advisors are being forced to examine their offerings and expand them accordingly as their more affluent clients—qualified purchasers—are looking for different types of alternative investments that offer non-correlated returns, access to cutting-edge thinking and serious growth potential. Research shows that the wealthiest people in the world are already heavily invested in private equity. There is still a big opportunity for investors with $10 million to $50 million, many of whom still have a relatively low allocation to alternatives and an even smaller one to private equity. Now is a perfect time for asset managers and technology providers to step up and help financial advisors meet the demand.
In this environment, at least initially, the majority of money allocated via financial advisors will likely find its way into private equity funds. Down the road there will be much greater allocations to direct investments regardless of how advisors manage to source the deals.
Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.