Wealth clients’ demand for private markets has led to a “major shift” in traditional portfolio construction, driving a new wave of growth for the asset class, fund managers have said.
“We are entering a new era of growth in private markets,” said Fabio Osta, managing director and head of the alternatives specialists team in BlackRock’s Emea wealth division.
Investors are moving away from the classic portfolio structure — 60 per cent allocated to equities and 40 per cent to bonds — and are now lowering their exposures to 50 per cent and 30 per cent, respectively, with the remaining 20 per cent invested in private markets.
“That is a major shift,” Osta said.
For many years the traditional investment strategy used by money managers has been to allocate 60 per cent of funds to equity markets to drive the main growth of the portfolio, and 40 per cent to bonds to balance the risk associated with investing in stocks due to the inverse correlation between stocks and bonds.
Though this portfolio structure is seen as the investment standard by many asset managers, it has recently come under scrutiny after both asset classes fell in tandem in 2022, with BlackRock estimating the classic 60/40 portfolio lost 17 per cent in that year.
In the meantime, private markets continue to expand, with data from PwC estimating that global assets under management will rise from $139tn in 2024 to $200tn by 2030. During that period, private markets will account for half of the total asset management industry’s revenue.
As the sector expands, wealth management clients are increasingly asking for more exposure to these markets, prompting a boost in investment.
“Growth is coming on the one hand from extraordinary investment opportunities related to AI, energy security, demographics and transition, but on the other hand increasing demand we are seeing from both institutional clients and the wealth segment,” Osta said.
In tandem, UK banks have been increasingly moving into the wealth management space, with NatWest acquiring wealth manager Evelyn Partners in February this year.
However, the “democratisation” of private market assets has not been universally adopted by the wealth management industry, as access has so far only been made possible to institutional clients and high net worth investors, and not retail clients.
The access point for retail clients is currently limited mostly to UK long-term asset fund (LTAF) or EU ELTIF structures, which allow investment through pension schemes.
While this increasing demand from wealth clients has not prompted a change in the underlying asset classes, asset managers are increasingly forced to create more complex fund structures to allow these clients to invest.
“The type of vehicles, or structures, that we are using has changed . . . which adds their own challenges,” said John Lee, managing director and head of legal at Macquarie Asset Management.
While the increase in regulation has helped managers to explain these structures to clients, over-regulation could end up harming the industry, others said.
“Regulation is very helpful and necessary when it ensures suitability,” said Oliver Wiedemeijer, managing director in the private wealth group at Brookfield Asset Management. “Where [regulation] becomes a hindrance is where it becomes fragmented and local and very detailed,” he added.
This can lead to the products becoming too complex and expensive. “[Then,] the universe shrinks,” Wiedemeijer said.
