Private equity funds ‘lift their game’ to attract wealth managers

The development of semi-liquid private equity funds is providing a way for wealth managers to get easy access to the asset class, according to a panel. 

Semi-liquid funds are those which offer a greater amount of liquidity while still providing access to illiquid asset classes like private equity and private credit. These options also allow investments of smaller ticket sizes which are more suited to a retail market rather than the large sums invested by institutional players.

The addition of these products to the marketplace has been described by Morgan Stanley as the “democratisation” of alternatives.

Speaking on a Lonsec panel, Justin England, who sits on the investment team at private equity manager Five V Capital, said he is finding that wealth managers currently have low exposure to private equity. 

“We meet a lot of clients in the wealth channel where the portfolios have a very low allocation to private equity, not even closed-ended funds.”

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The existence of evergreen funds, he said, demonstrates how barriers are coming down for wealth investors to allow greater accessibility to the asset class.

“The barriers are coming down with semi-liquid and evergreen [funds], you can get access to the asset class really quickly now and start compounding.”

However, just because they are more liquid products doesn’t negate the need for strict due diligence around manager selection.

“Manager selection is extremely important. Within private equity, we think about risk in terms of mandate being where is your manager focused? Are they trying to do large deals? Are they focused on mid-market? Are they doing sector-specific deals like healthcare? These are considerations, so I would encourage people to dig into this because there is real risk in getting your manager selection or mandate choice wrong in your portfolio construction.”

Asked how retail or wholesale clients can be confident in the valuations of these funds and their governance processes, England said he has noted private equity firms are improving in this area.

“It’s a fascinating scenario. You’ve got public equities in contraction, and people are looking for more exposure to private markets to invest in businesses. What this has done is, because of the sheer size of private markets, it’s driven product innovation and access for all types of investors. 

“The net of that is your stereotypical private equity manager with only closed-ended funds, with historical valuation practices, has had to lift their game if they want to remain relevant.

“Historically, lots of managers were holding their investments at cost until the exit so you saw the NAV track sideways and jump at the exit point. That is much more sophisticated now with the rise of semi-liquid and the managers’ ability to raise capital. We’ve had to adopt really rigorous valuation processes so typically the fund manager will value through a robust process every month or quarter and have an independent valuation committee signing off on that.”

Appearing on the same panel, Claire Smith, alternatives director at Schroders, agreed with England and said the fund manager has tripled the size of its private equity valuation team since the launch of its evergreen version. The Schroder Specialist Private Equity Fund was launched in March 2020 and focuses on small and mid-cap specialist opportunities.

“Because we have people trading on that NAV every single month, it has to be done with a great degree of discretion and we have an extremely formulaic process where the valuation team is independent from the investment team.

“The company also needs to give us their monthly financials to get into the evergreen fund.”