Why advisers increasingly look to private markets

0:12Hello and welcome to the FT Advisor podcast. My name is Tara O 'Connor. I'm a chief reporter at FT Advisor and joining me today is Jonathan Moyes, head of investment research at Wealth Club. Today we're going to talk about private markets. At the start of September, it was announced that retail investors would be given access to private markets on the Hargreaves Lounstamp platform in the shape of two long-term asset funds from Schroder's. This prompted a lot of debate from FT Advisor readers on whether they would let their own clients invest in private markets. They raised concerns about private equity valuations and whether their clients would get stuck in these assets, basically.

0:52Wealth Club launched as a private markets platform for retail investors in 2024. So I think you have quite a unique insight into this, Jonathan. I can hear our compliance team now sort of chatting. I mean, strictly speaking, we don't offer the private market funds to retail investors. We do offer it to private individuals, but you have to be an elective professional client to invest in these funds. So it's a slight nuance. I think in time, we will offer something to retail investors. But on an individual fund by fund basis, for us, it feels a little bit too risky. so it probably looks something like a more like a model portfolio service for high net worths where you can get a broad spread of funds on an individual fund-by-fund basis feels a little risky to go straight into high net worths so little points are just make you aware of really great um well jonathan do you want to start by giving us a bit of an overview into how investors are accessing private markets in 2025?

2:01Sure. So really, I think there are three key ways that investors are accessing private markets. There's traditional LPGP drawdown funds. That's mainly the preserve of institutions. There's investment trusts. And then there's these new evergreen or semi-lifficit fund structures. Really, for UK wealth, you can pretty much rule out traditional LPGP drawdown funds. Long story short, they're just an admin nightmare. If you want to invest in lots of funds and you're going to want to, if you want to build a diversified portfolio, you're forever going to be answering capital calls. And we've looked at it and it's just admin hell.

2:45So I think you can rule that option out straight away. That's going to be the preserve of institutions and the ultra, ultra high net worths where they can literally employ a team of people to manage that process for them. For most investors in the UK, it's just too expensive to administer, really. So you're left with two options. Investment trusts and evergreen funds. I think investment trusts, yeah, they've been around for a long time. I think 1856, everyone likes to say. So they've kind of stood the test of time. You do get a good range of options, but I do worry for investment trusts. I think there's lots of benefits, platform availability, SIF availability, daily liquidity.

3:31But I'm a little bit nervous for investment trusts for a couple of reasons. One is the natural buyers of investment trusts, the really decent investment boutiques. They're all being gobbled up by consolidators. And the problem with that is as soon as you get consolidated and you're part of a much larger wealth management business, it's no longer possible really to buy investment trusts in the same way. Because ironically, they're not that liquid. And you can't really deal in significant size. So for the poor old investment trust, they've lost a lot of natural buyers. And at the same time, they haven't really bought back many shares.

4:12I know there's been an active investor come in and try and get them to buy back shares. But what you've seen is really a drop in demand for investment trusts. And supply hasn't really dropped. And so what you've seen is discounts blow out. And also, so that's kind of stressful on the demand side as an investor, seeing these wide discounts. And it appears like no one's really doing much about that. but on the supply side I think it's really difficult to build a broad based diversified private markets portfolio just with investment trusts. Yeah the unbelievable stat I realised recently was if you look at the top 300 private equity firms in the world, not one of them has launched an investment trust in the last 10 years.

5:00Isn't that shocking? I think that's shocking and the same goes for infrastructure you basically can't get core infrastructure in investment trust form. You can get a few kind of mid-market, more niche exposures, maybe pantheon infrastructure is arguably there, but there's no choice and it doesn't look like there's much supply coming down the track. So I think investment trusts, I'm a big fan of investment trusts. We own a handful in our model portfolios, but I do really worry about their future. I don't know if they'll be on this list in sort of five, ten years' time, which is quite sad. And then coming up behind them and, you know, looking really competitive are these evergreen or semi-liquid funds.

5:47Now, in the UK, we've focused a little bit on LTAT, which is a UK fund structure that's launched in the UK. But really, all the exciting things are happening in Europe and globally in the US, Asia. In Europe, they've got this structure called the C-Cav Part II. and really you're seeing all the world's top private equity, credit, infrastructure and real estate managers launch these evergreen vehicles and the range of funds and managers you need to expand to is just phenomenal in comparison to investment trusts. So I think in 2025 and beyond, I think it's going to be a story of the evergreen fund.

6:28I think it's something like$400 billion has been raised in evergreen funds now. it's been amazing this sort of explosion of evergreen fund offerings so I think that would be pretty interesting I learned how we've launched a private market platform that offers them I guess it's super interesting alongside obviously you said there's kind of this drop in demand for investment trusts but it does seem there's definitely like an increased interest in private markets where do you think this is coming from what's kind of pushing investors to this space yeah i think i don't know i think the demand has actually always been there i think it's no secret if you're running money in the uk you know that the world's top multi-asset investors around the world have 20 to 40 percent in private markets and you also know that you can't access them yeah i remember this is going back 15 years ago now but i was at one of the posh investment conferences that used to be in monaco for a week and i was sat next to a chap um it was a multi family office in europe and it was talking about some funds that he bought recently and some of them were coarsely dealt some of them were private and i just thought you lucky devil you know you in the uk you you do get a sense that yeah there's a whole universe of investments that you just can't get exposure to um so i think demand's probably always been there the thing that's changed is this accessibility to the launch of these evergreen funds.

7:59The evergreen structure actually has been around for about 20 years. It's just more recently it's been tested. So there's a big fund in the US, Blackstone Reits, $100 billion in assets. That had to gate to redemptions in 2022 when interest rates shot up. So basically with all these evergreen funds, there's a mechanism where they're designed to have redemption gates if if investors want more than five percent of the fund back um it will shut to redemption so if 10 of investors wanted their money back each investor would only get half um and that was always kind of a question mark for these evergreen structures that how would they cope in a really stressful environment where the fund had to put redemption gates up would that just create a massive run on the funds would that just be carnage basically for the underlying investors and blackstone i think handled it so well i think investors were gated for 15 months and in the worst quarter i think you could you'd get a third of the money you wanted back um on average i think it was about 50 or 60 percent of your of what you wanted you get back in each quarter and it lasted it lasted 15 months so that whole process and that experience of gating a very large fund in an incredibly stressful environment for the asset class I think that basically just greenlit all the top private market firms to say actually we need to start looking at these evergreen vehicles and start accessing private wealth so I think that's a really long-winded way of saying accessibility has really improved.

9:41Interesting and do you think that kind of that experience of of gating or witnessing that has led to some kind of I don't know a bit of wariness particularly from advisors some have obviously told us that they would they would never tell their clients to invest in these assets do you think those attitudes can change I think I think the attitudes might change but I think probably in different ways I think at the moment when you speak to a client and you go through the risk profiling process there's obviously if you can imagine like an asset allocation pie chart everyone has their own asset allocation pie chart and in theory everyone should have their own unique asset allocation pie chart for their own circumstances um i think the market is going to change and i think there's going to be a second pie chart there that's called liquidity um at the moment everyone in uk wealth pretty much is 100 invested in daily liquidity i think there are huge numbers of investors who don't need daily liquidity across the whole portfolio.

10:48So for instance, my pension, I'm not going to touch for 30 years, is 100 % in daily liquidity. That doesn't make any sense. So I think attitudes will change, but I think there'll be like a tiering of wealth. There'll be a premium wealth management an offering that includes not only daily dealt funds but monthly and quarterly maybe even annual funds as well in the future um but i think it's i'm not sure if many in the uk are aware of that blackstone fund i know it's large but it's not really that that well covered um i mean it was definitely a green light for the for the sector to start launching funds um maybe the advisors just need to see it in action in Europe.

11:35Yeah. And what would you say to their concerns, I guess, about some of them about that the assets underperform global indices or the fears that investors could get stuck in them due to the valuations being under pressure? I mean, do you think those hurdles can be overcome? I think so. I think without doubt, over the longer term, say 15, 20, 25 years, private equity has outperformed public equities. but I think there's always going to be cases where if you pick the best performing equity market over the last say 10 years that almost certainly whatever's performed best over 10 years is probably going to smash the average private equity fund but I think that's focusing too much on past performance and short term past performance I think the way to manage money is you want to be as broadly diversified as possible and you want to fill your portfolio with world class managers and private markets are an excellent way of doing that.

12:37It feels a little bit too, for me, it's too much on the macro side trying to predict which asset class is going to perform best next. I don't think you want to do that. I don't think anyone's very good at it. But I think if you look at these, private equity has probably had subdued three years, that's fair to say. there's definitely some insuggestion from trying to digest the rise in interest rates corporate mna activity has been weaker than it has been historically um and so performance has been kind of single mid to high single digits versus yeah us equities that have obviously gone off to the races but i think you're even the sort of investor that looks at the past three years and things private equities unperform now is as good a time as any to enter the asset class you know if you're going to add a new asset class to your portfolio, it might as well be after a period of three years where it hasn't shot the light zone.

13:34Or you're going to be the sort of investor that just stays away and just focuses on whatever performed best over the past three, five years. I think for most investors, it's about building diversified portfolios and filling them with quality assets and quality managers. So I think assets will change. Yeah, totally. and I think you've actually done a bit of research on this, haven't you, at Wealth Club, which found that advisors are expecting to recommend clients to invest in private equity, real estate, venture capital, private debt and infrastructure. That's true. Yeah. Sorry, I completely interrupted them.

14:14Yeah, no, it's fine. It's a bit at odds, I guess, with what our readers have been telling us. So I suppose... It is definitely... potentially it's definitely a case of the silent majority are thinking about private markets. I think it's quite emotive, I think, because it's, I think a lot of this came out with the ALTAP and Hargreaves and Schraders and memories of Woodford and all the rest of it. So because we, yeah, we're truly passionate about private markets, we think it's a huge opportunity and private wealth is going to be of huge benefit to our clients. we weren't really convinced that we weren't in some sort of private market echo chamber and that everything we're seeing is just positive private markets so we did commission some independent market research that went out and polled all sorts of people really private equity managers hedge fund managers all sorts of different professions one of which was advisors and wealth managers and it was something like the findings main finding was 90 percent of advisors and wealth managers are looking to increase their private market exposure by 25 or more over the next two years which it was really quite strong fast stronger than i was expecting um yeah anecdotes me i think when i speak to advisors and wealth managers around the country at various things private markets are definitely more of a talking point now that's for sure um and i was at a conference last week for private markets and that was incredibly well attended lots of top wealth managers and advisors were there and i went to a similar conference two years ago and it was a ghost town there was no one there at all so i think behind the scenes there's definitely a move by advisors to start thinking more about private markets um and i think that's partly because if you look at mainstream investment portfolios and where they're headed you know We have seen kind of this huge race to the bottom on fees and portfolios have become incredibly generic and passive-focused.

16:18And if you look at markets today, these portfolios do have a diversification problem. I think most clients, are they asking for private markets? Probably not. But when they go and see their wealth manager or advisor, they want some very good financial planning and they want the sensible investment portfolio. They don't mind what's in the portfolio. They just want it to be sensible. And I'm not sure you could convince someone that having so much of your money invested in a handful of companies and probably having 40 plus percent exposed heavily to one investment theme that's exposed to a massive capex cycle is all that sensible.

16:54So I think definitely a lot of advisors, I think, are thinking, wow, how do we diversify but maintain quality? And private markets is the answer to that. But, yeah, it's definitely quite exciting. There's definitely a move towards private markets in short. Yeah. Do you think it's kind of on advisors then to bring this up as an option for their clients if maybe then their clients themselves aren't going to be as aware of it? I think so. And I think being aware of the risks of just having public equities and public credit. it um i think in the next year looking at what's coming down the pipe there's going to be just an enormous array of funds that you can invest in and you can build some phenomenal private market portfolios that are incredibly well diversified i think once advisors can start building those and start sharing those to their clients that's when the education piece can be really powerful and i think you can diversify away from having you know a large number of your eggs just in one basket um but i think it will be advisor then for sure totally and do you think there are any areas um which will be particularly popular or or easier i guess to get a handle on for advisors and their clients yeah so i think looking at our platform um so the the kinds of people that have been investing on our platform are private equity professionals, hedge fund managers, traders, wealth managers, private bankers, that sort of thing.

18:29People in the city, basically. And as individuals, they've been buying, really, it's the big brand name private equity funds that have been of most interest, the likes of EQT and Apollo. Obviously, you can't buy either of those in an investment trust. The only way is evergreen for most advisors for most clients um for advisors again i think they're going to be they're going to approach this differently um yeah the opportunity for them to build well diversified private market portfolios that are just full of truly world-class private market managers yeah the top tier i think is um it's going to be amazing i think over the next couple years you're going to see just some amazing private model portfolio services launch and I think UK wealth clients are really going to benefit from that.

19:20So you see I guess over the next two years you said that you've seen it grow so much over the last two years do you see that I guess continuing to grow that interest getting bigger and bigger? Yes I think we were starting to see a lot of pent-up demand and I think the key barriers today are definitely platform availability is still really quite poor um and that's going to take some herculean effort from one of the big advisors to get some of these platforms to start doing monthly and quarterly health funds um anyone who's ever tried to add a fund to a platform knows the pain that goes into that particularly c-claps and that's even when they've got the same dealing terms as all the other funds platforms need to come on board i think by by h1 next year there'll be just an amazing choice of funds so i think the funds accessibility i think the availability of funds that problem solved by the middle of next year platforms have got to move i think the the benefit of um of harbreeds launching this ltaf is every platform at least now needs to answer the question are they going to consider evergreens and i think if they're thinking about whether they should consider them or not just look at what's happening in the us and in europe there's a phenomenal amount of money being raised in these funds and really uk platforms should be offering them so i think it's only a matter of time before platforms start offering them and then after that barrier is cleared and that's not you know insubstantial um you've got to get some of the sip providers on board as well because i think for clients for high earning youngsters uh in their 20s and 30s and 40s you want a good experience for private markets you've got such an advantage with that time horizon um so i think i think pensions are going to be quite an exciting thing for evergreens yeah um yeah so a few barriers to clear but i think demand's just going to grow and grow I think we'll see I don't know, 10 years from now I think we'll see 30 % of assets but I suppose for clients where it's suitable I think you'll see a large chunk of assets move into evergreens obviously there are clients where if your money's not permanently invested if you do your financial plan and your cash flow modelling and you're going to run your pot down close to zero these aren't suitable for you at all But for those clients who are in reality permanently invested and they're just growing their pot for future generations, evergreens are going to be a major part of their portfolio.

21:59And if you're in accumulation and you're 20 years from retirement, I think they'll also be a major role in your portfolio. So it's exciting. It's very exciting. Yeah, it's exciting times. And I mean, it sounds like we might have to get you back on in a year or so to see if your predictions are true. yeah okay give it give it to you it is well thank you very much Jonathan for joining me today it's been super interesting um and I hope you've all found that interesting too thank you for listening and tune in again next time for the FT Advisor podcast

22:47Thank you.