Nine Nut of 10 Wealth Management Clients Want Access to Private Markets, as They Seek to Mitigate Political Risk from Portfolios

  • Wealth Management
  • 20.10.2022 11:45 am

Private markets are now a core component of a holistic wealth management service, with 94% of firms either already offering clients access to these investments or working towards it.

As public markets have remained highly volatile in 2022, 65% of firms have transacted more than five alternative assets deals in the last 12 months, with 38% of managers involved in more than 20 deals.

More than half of managers (53%) say operational challenges are the biggest barrier to scaling their proposition, with two in five (41%) flagging regulatory risk and a lack of resources.

More than four in five (82%) wealth managers say technology plays an increasingly important role in how their clients access private markets.

Wealth managers are increasing their clients' access to private markets as they seek to bypass the volatility of public markets and balance their portfolio's risk, according to Delio's Private Markets in Wealth Management 2022 report.

New Chancellor Jeremy Hunt’s decision this week to scrap most of his predecessor’s mini-Budget measures, which significantly spooked markets last month, has gone some way to improving market stability. But this is a perfect example of the kind of turmoil investors are keen to protect themselves from, with nearly nine in 10 (88%) wealth managers reporting clients are seeking access to illiquid investments, according to the report. Wealth managers are responding accordingly, with 94% of firms saying that they now offer, or are planning to offer, their clients access to alternative assets.

Much of the increased investor interest has been precipitated by the Covid-induced crash of public markets, followed by an extended bull run in 2021, and then another sharp decline over the course of this year. The volatility seen in public markets in recent weeks serves to underline why private markets have risen in popularity so much.

Alternative assets have remained relatively immune to the chaos surrounding public markets. While some alternative asset sectors have been impacted far more than others, the overarching resilience of private markets has made them an essential component of a portfolio seeking investment returns.

Gareth Lewis, chief executive and co-founder of Delio, said: “The importance of private markets to wealth management clients is now clear for all to see. The question for wealth managers is no longer if they offer access to alternative assets, but how they do so in a scalable and efficient way.

“While there is definitely risk inherent in these types of investments, the way that risk manifests is very different from public markets. The relatively illiquid nature of private markets means they are less affected by a shift in sentiment due to external factors, which we see in public markets regularly, and especially in the last few weeks.

“This makes them a great addition to a diversified portfolio. It is no wonder more wealth managers are seeing how important they have now become for their clients.”

Direct investments overtake  funds

Delio first undertook this research back in 2019 when most wealth managers who offered access to private markets did so through a diverse range of asset classes, with more than half offering funds, direct investments and real estate deals.

Three years on, and the diversity of investment opportunities available to wealth management clients has increased, yet most firms seem to be consolidating their offering into either direct investments which are offered by 71% of wealth managers, or alternative funds (41%). Impact investments remain popular and are offered by just over one in three firms, while private credit deals are available to the clients of 29% of wealth managers. A smaller proportion of firms are even enabling access to hedge funds and even ‘passion’ investments, such as classic cars, fine wine and antiques.

Gareth Lewis said: "Our research highlights the notable shift in approach that wealth managers have taken in the last three to four years. This is largely due to the significant market turbulence we have seen over this period, firstly due to the pandemic and more recently because of the war in Ukraine and the latest political upheaval. There is no escaping the fact that political decisions have a major impact on the markets, which has been dramatically illustrated in the last fortnight.

“Prior to this, many firms were still in the planning stage when it came to offering private markets to their clients. However, these recent periods of instability have simply confirmed the fact that investors want to allocate more of their wealth to private assets in a bid to mitigate the vagaries of political and economic impacts on their portfolios.

“This has forced slower adopters to accelerate  their plans to offer alternative assets to clients as they found themselves playing catch-up, while early adopters were able to shift gears quickly and consolidate their market advantage.”

The wealth management industry is at a crossroads

Wealth managers must decide whether they will commit to scaling private market access by investing in digital tools to do this efficiently, or whether they hope that other aspects of their service are enough to satisfy the majority of their clients while leaving alternative assets available only to their wealthiest clients.

Gareth Lewis added: “One thing is certain - making the correct decision will have significant and long-standing strategic implications.”

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