Private fund managers should review their client base every two years to combat concentration risk arising from changes transforming private markets, according to Josh Bourone, managing partner with Ganryu Capital Partners of Zurich.
“Fund managers should no longer solely rely on institutional appetite to raise funds,” Bourone concluded in a white paper outlining the forces shaping the global private equity business. Private individuals will ultimately move in to augment institutional investors.
The paper represents “a call to arms to the industry,” Bourone told Private Fund CFO, as he outlined the strategic responses needed to access wealthy investors in Western Europe and North America. “Strategic planning involves considering their clients and the kinds of products needed to reach them.”
The report, titled “Private Markets for Private Investors” and released in mid-June, underlines trends that are forcing private fund managers to diversify their client bases. To Ganryu, it is no longer a question of if, but when managers reach out for these new customers.
The market opportunity is large. Ganryu, citing the Allianz Global Wealth report published in September 2020, estimates that North American and European households hold €129 trillion of financial assets. North Americans mainly hold securities, while Europeans are “hoarding their savings in unproductive deposits,” the report concluded.
Investors will ultimately look to private markets over the medium to long term to protect returns. Both North America and Europe represent “sizeable addressable markets,” the report says. Even a 5 percent share of their financial assets represents €6.5 trillion, or about $7.67 trillion.
Demographics explain some of the opportunity. In the Western world, the working-age population is shrinking while the retirement population grows. And there is a growing gap between what individuals expect to receive in retirement and what pensions are effectively able to deliver in a low-interest environment.
The report shows a consolidation drive among institutional investors. The biggest institutions are taking private markets business in-house and doing it directly. Additionally, institutions regularly reassess or reduce manager relations, the report said. Smaller pension funds have seen a trend of consolidation to cut costs. These phenomena mean relying on a few large investors represents “a critical business risk for fund managers,” the report concluded.
Behind consolidation rests a broader trend. Pension funds are shifting from defined benefit to defined contribution, putting more of the investment decisions directly into the hands of private investors and their advisers. This will give rise to a rebirth of insurance-type products and retirement supplement plans, according to Ganryu.
Fund managers with the necessary technical expertise to launch, manage and operate these products will have a head start in getting personal investment clients. “There’s a lot of room for creativity in private markets,” Bourone said. “The institutional system has become so standardized.”
Bourone noted that he was “shocked” to find that Western European investors kept so much of their money in deposits – an estimated 30 percent of personal assets, roughly three times their North American counterparts. Insurance poses yet another dividing line. Western European investors have about 40 percent of their assets in insurance products, while North Americans have about 30 percent.
Perhaps this is an indication of the conservatism of Western European investors. The pain of holding deposits might well prompt them to move more readily into private markets in search of yield, Bourone noted.
North American personal investors appear to be more heavily invested, with more than 50 percent of their assets in securities, compared with about 30 percent for their Western European counterparts. “In North America the money is already in motion where individuals and their advisers are deciding which form of investment to adopt,” Bourone added.
User friendliness of products represents a key to successful fundraising. Private investors do not have the teams that institutional investors have to analyze and execute in private markets, Bourone said.
Often private investors rely on the wealth manager, a single point of contact, to manage all their financial needs. They tend to focus more on overall product characteristics and the experience of investing, the report said. And their investments must address characteristically unpredictable liquidity needs.
Systems will have to address issues like the smooth handling of distributions, and how best to smoothly recycle investment without hampering performance. Investor eligibility also presents a need for managers to segment investors into various categories.
Early movers will be rewarded. With the adequate product lines, distribution partnerships and proper client engagement, the relationship with private investors will be “stickier” than with institutional clients. But the opportunity is not open-ended. “Once a few winners have crystalized, the market penetration for new entrants will be much more challenging,” the report advised.