PWM’s annual awards see private banking recognising the opportunities available in making private markets more accessible to their clients
There are a number of key trends highlighted in submissions for the Global Private Banking Awards in 2022. These include rising allocations by wealth firms to private assets and the emergence of boutique firms ready to steal market share from the global giants.
But, as our awards judges tell us, these movements are more nuanced than the headline trends suggest and come with intrinsic challenges.
Around 90 per cent of assets allocated to private markets are currently held by institutional or ultra-high net worth investors, estimates João Miguel Rodrigues, principal for financial services and private capital at consultancy Oliver Wyman. Going forward, the high net worth segment of the market will play a more important role.
An additional 5 per cent allocation represents a $1.5tn opportunity to wealth managers who understand that delivering private market products is increasingly viewed as a core capability for private bankers.
“As classic fixed income, cash and equity portfolios do not deliver meaningful returns post-cost and inflation, clients need to add additional uncorrelated asset classes with higher risk-adjusted returns,” says Mr Rodrigues.
With the historical hurdles of limited liquidity, prohibitively high investment thresholds and lack of education around the asset class being progressively tackled by private banks, opportunities are fast becoming more accessible.
“For wealth managers, this is a major opportunity,” he says. “It can be a source of competitive differentiation, a protection against downward fee pressure, and a way to increase client stickiness and secure a source of recurring revenues.”
Ugly liquidity
“Clearly, private assets is the asset class which is being aggressively pushed by private bankers, especially at a time when all other asset classes suffer,” says Shelby du Pasquier, head of the banking and finance group at lawyers Lenz & Staehelin in Geneva.
“That said, these assets raise specific and complex issues, in particular in terms of due diligence, valuation and liquidity. Some of the promoters of these products are not necessarily equipped to deal with these issues. As a result, it is very likely that we shall see problems down the line with this asset class.”
One key question is whether the current private wealth surge into alternative assets is a timely investment. “I fear some of the late comers to private assets are arriving just as liquidity and performance are turning quite ugly,” says Kim Cornwall, founder of Cornwall & Co Consulting, which designs training programmes for banks and financial institutions in Europe and the Middle East. “Their clients may not have a good experience, which will inevitably lead to losses and litigation.”
While there is a much greater willingness among private banks to look at all potential sources of returns in a low return environment, many clients being shepherded towards this asset class by advisers are yet to realise the challenges.
“Rising allocations to private markets by all investor types have reduced opportunity sets, as indicated currently by the amount of dry powder: unallocated capital. For example, nearly a quarter of assets in private debt is held as dry powder,” suggests Amin Rajan, CEO of the Create-Research consultancy.
“Exit costs in the event of premature withdrawals of funds are high, as each mandate is customised. Although private markets offer meaningful diversification, this disappears when most needed in down markets. Private markets’ illiquidity premium comes at a high price.”
Yet there is a sense of inevitability that banks need to spread their wings into alternative assets, particularly in today’s climate of spiralling inflation and raised volatility in public markets. While this is partly in response to client demand, there is a growing understanding that the investment engine is central to the private banking business model and a key differentiator between rival institutions.
“This trend is more a reflection of client demand aligned to improvements in many financial institutions’ capacity to service these asset classes,” says independent wealth management consultant Sebastian Dovey.
“There are now platforms – white labelled or home built – that many have been progressively engaging with in the past three to four years, which are beginning to reach critical mass. Crucially private banks recognise that private markets can form a significant returns contributor in the current market environment and the investment committees of these institutions are now willing to consider this as part of the overall asset allocation modelling.”
The design of technology platforms to help distribute the latest strategies is a key catalyst for their expansion, agree our commentators. “Alternative investments and private market investments receive large portfolio allocations due to current market conditions that have led wealth management firms to broaden their product line-up,” says Alois Pirker, research director of the wealth management practice at the Aite-Novarica group in Boston, US.
“Another reason for this change has been the increased efficiencies in processing these products resulting from platforms such as Cais or iCapital.”
The dynamic around private equity is also boosting the emergence of boutique firms, prominent in the US market, where a number of smaller shops managing more than $30bn have been growing to such an extent that they are becoming serious challengers.
“There are a new breed of firms emerging in the US that have not been that visible only five years ago,” confirms Mr Pirker. “The easy-access to private equity investments in recent years has fuelled inorganic growth and creates new champions in many wealth management segments.”
This does not appear to be a temporary phenomenon, believe the trend’s propagators. “This trend will continue, especially as the giants get too big and the managers forming boutiques realise the personal rewards available are greater in being independent,” says Ray Soudah, founder of M&A and strategic advice consultants MilleniumAssociates.
“In the US, there is more innovation, with inorganic growth of new champions,” says Malik Sarwar, senior partner at the Global Leader Group. “The single biggest driver of success is rather simple: what is your one unique focus?”
No more business as usual
But these firms must deliver consistently in three critical areas – investment performance, client service, fees and charges – if they are to survive and thrive. We have already seen a number of boutiques in both Europe and the US which have promised a brighter future, yet failed to achieve scale or been absorbed by the behemoths because they have not kept pace with these objectives. “Without a proven track record in these areas, they will struggle,” agrees Create’s Mr Rajan.
Yet there is also a real sense that the biggest private banks have dominated the market for too long, without any real innovation and that the time has come for new entrants to step up.
“Many of the innovators will thrive and become a force to be reckoned with,” believes Mr Cornwall. “The US has always been at the forefront of innovation, and I worry about some of the old school European banks being left well behind by failing to adapt to the changing market conditions. It will not be business as usual.”
