Private assets for wealth management clients: why, and why now?

Private client wealth managers have had robust arguments for allocating to private assets for some time. By 2021 four in five UK wealth managers had invested a portion of clients’ money in private assets.¹

These allocations are typically made in pursuit of enhanced performance and diversification, arguments that historic data continues to support. But other factors, such as the emergence of new vehicles for private asset investments, and the declining number of publicly-quoted companies, are also driving the trend.

Investors are also watching the investment landscape shift and assessing how resilient portfolios will be to a much altered environment. Of the major themes unfolding – like artificial intelligence and the renewable energy transition – many require private capital backing.

How robust are the return and diversification arguments?

Past performance for numerous private asset classes compares favourably with liquid investment types, like traditional equities and bonds, over longer investment horizons.

Crucially, private markets also have a history of performing differently to liquid markets.

Measuring how different investments move relative to one another – the correlation – is crucial to creating meaningful diversification. Again, data indicates that private assets can contribute to portfolio diversification.

What do the numbers mean?

A correlation of 1.0 (technically the “correlation coefficient”) means two assets move in exactly the same way. Smaller numbers indicate lower correlation.

James Ellison, Head of Private Assets Data Insights at Schroders Capital, explains:

“Private market investments offer a compelling means of diversifying a portfolio. The correlation between private asset classes and public markets is lower - as shown by the table. This allows them to provide diversification benefits by moving independently of the public markets.

“As well as behaving differently to public markets, they tend to behave differently to each other; well-balanced private asset portfolios can help mitigate risk. Additionally, the investment strategy itself can create further diversification, such as private equity investing in the lower mid-market.”

New investment vehicles offer institutional-style private asset exposure for wealth managers and their clients

The above explains the familiar attractions of private assets for both advisers and their clients.

But what about the “why now”? What has changed?

Even for those with private market allocations, the overall share of portfolio remains low. The Investment Association found that private market investments comprised an average of 5% of UK wealth managers’ assets under management in 2021² . By comparison, our own research indicates that institutional investors had allocated 14% of their portfolio to private assets the same year³.

This discrepancy is in part because institutional investors have had access to a much broader range of solutions, structures and private asset managers. The options for individual investors, advised or otherwise, has been limited.

In the UK, individual investors have been able to use investment trusts for exposure and little else. However, ongoing growth and development in the private asset industry is changing things.

The long term asset fund (LTAF) has been spearheaded by UK regulator the Financial Conduct Authority (FCA) as a “new category of open-ended authorised fund designed to invest efficiently in long-term assets.”

The FCA created a new regulatory regime in 2021 to realise the LTAF structure.

LTAFs were initially designed to put pension capital to work supporting the UK’s long-term economic growth and the transition to a low carbon economy. New developments mean advised and discretionary investors will also be able to invest in LTAFs.

Widening the LTAF scope means more options in the UK authorised funds ecosystem, providing another access point to private markets for investors. We expect the LTAF to be a complementary tool to existing private asset structures – like investment trusts - offering new flexibility in how UK investors will be able to meet their objectives via private market investments.

Public markets offer shrinking opportunity to access growth investments

While access has improved for private markets, options in public markets have continued to narrow.

The number of listed companies has been falling for years, and not just in the UK. The trend has been echoed in major markets around the world.

In 1996 there were over 2,700 companies on the main market of the London Stock Exchange. At the end of 2022 this had collapsed to 1,100, a 60% reduction. There has been a near-75% fall in the number of UK-listed companies since the 1960s.

Germany has shed more than 40% of its public companies since 2007 and the US has experienced a 40% drop since 1996.

One of the most striking effects of this decline is that the stock market now provides exposure to a dwindling proportion of the corporate universe. This is not just a UK issue: in the US, for example, fewer than 15% of companies with revenue over $100 million are listed on the stock market³ . Ordinary savers are largely deprived of the opportunity to invest directly in the rest.

Investors who focus solely on the stock market are missing out on a large and growing part of the global economy. Where they can, investors will need to explore private asset options to capture the growing private investable universe.

The decline is discussed in more detail in this piece by Schroders’ Head of Strategic Research, Duncan Lamont, How should investors respond to the stock market's dwindling status? But it is another powerful reason for investors’ increasing interest in private market allocations.

In the coming weeks, we will delve into more questions around LTAFs, how they will work, and how wealth managers might seek to incorporate them for private clients.

Sources:

[1] Source: The Investment Association, Weaving private assets into wealth portfolios: Evolving structures to meet evolving needs

[2] Source: Schroders, Schroders Institutional Investor Study 2022

[3] Ibid