Comment: The new PE investor

Financial technology is digitally bridging private equity and its newest investor channel – qualified high-net-worth individuals, writes Artivest chief James Waldinger. 

In November, Tiger 21 provided further evidence of a suddenly familiar, blossoming courtship involving a famously exclusive asset class – private equity – and its newest in-group, high-net-worth individuals.   

A network numbering 360 people in the US and Canada who have a minimum net worth of $10 million, Tiger 21 in its annual asset allocation survey reported that its typical members now dedicate 20 percent of their portfolios to private equity – a considerably larger allocation than its median 14 percent in 2007. 

Recently, as private equity firms have attempted to attract capital from so-called “qualified purchasers,” or people with a minimum of $5 million in investments, the asset class has increasingly availed itself to allocations in the hundreds of thousands, in addition to the tens of millions –its traditional threshold.  This decision has been driven by the desire to diversify their traditional institutional capital base and become one of the first movers in capturing the growing HNW channel. Conversely, high-net-worth individuals are matriculating to private equity, enduring risk and long-term fund durations in exchange for the possibility of higher alpha during this period of increased market volatility and macroeconomic uncertainty. 

Case in point: family offices.  Established to offer high-net-worth individuals private financial planning and wealth management services, family office allocations are credited by research firm Palico with making up 8 percent of the $4 trillion invested in private equity.    

But tapping previously underutilized channels of capital or investor demand only explains why the distance between private equity and individuals is closing. The question of how has remained largely unanswered, if not altogether unasked – until now. 

As independent advisors seek new funds to offer, private equity firms expand distribution channels and qualified investors expect to access high-caliber funds from their independent advisors – a perfect storm is brewing. At the center is financial technology, or fintech.  By streamlining tedious, labor-intensive compliance, marketing and operational processes –such as issuing capital calls, performance reporting or managing marketing collateral –fintech is enabling easier, more efficient access to private equity for RIAs and clients.  Fintech’s inherent scalability also bodes well for the trend’s expected growth.  By 2019, more than 25 percent of current wirehouse advisors plan to join RIAs, according to analysts at Cerulli Associates, bringing their Rolodexes of high-net-worth clients with them. 

In addition to providing the technology, operational infrastructure and analytical tools for advisors, fintech is also enabling private equity fund managers to properly vet, analyze and sell to the burgeoning channel of high-net-worth investors previously beyond the reach and limited manpower of their investor relations team. For managers, leveraging the scale of a fintech platform not only facilitates regulatory compliance, such as know your customer procedures, but also creates an economically feasible path to serving the highly fragmented independent advisor market. The only challenge going forward might prove to be on private equity fund managers in keeping up with investor demand.     

James Waldinger is chief executive of Artivest, a technology provider that connects high-net-worth investors with alternative asset funds.