An estimated 8,000 family offices are currently managing $3 trillion of private wealth. These sophisticated investors have long had access to private markets, unhindered by the large investment minimums and long-term lock-ups associated with closed-ended feeder funds. Alongside Ultra High Net Worth (UHNW) investors, they sit at the apex of private wealth.
For the last 25 years, they have been the predominant addressable market for private bank feeder funds.
That is now changing as technology and product innovation bring evergreen solutions to the mass affluent market, creating the ‘retailisation’ of private markets in a similar manner to traditional mutual funds. Thanks to their relative operational simplicity and more regular liquidity windows, evergreens are also being used by institutional investors.
“These types of products were initially structured and built for private clients but they are being used a lot by institutional investors because they eliminate, at least in part, the cost of opportunity of having capital calls and distributions,” noted Greta Teot, Head of Private Markets, Mediobanca.
Even though institutional investors, SFOs and UHNW investors are showing interest in evergreens, it is the broader retail market that is likely to drive demand for these open-ended structures in the coming years.
INDEFI - a strategy consultant in the asset and wealth management industry - estimates that the total amount of assets held by individual investors has doubled since 2016 to EUR360 billion.
Segment Categorisation
Private wealth is a markedly different universe to the seasoned private equity GP who has only ever catered to institutional investors when privately placing their fund(s). The world of pensions and endowments, insurance groups, sovereign wealth funds, fund-of-funds and multi-family offices is one of deep-level sophistication, significant capital reserves – where writing tickets in the millions or tens of millions is standard practice – and a clear understanding of the long-term illiquid nature of private markets.
By contrast, private wealth caters to a broad swathe of investors. For simplicity, they can best be thought of in three categories: see table below in Figure 3.
At the top of the food chain are the ultra-high-net-worth investors (including single family offices), defined as those with net investable assets of at least $30 million. They have the capacity to write tickets of $1 million+ in any given investment and are most closely associated with the typical ‘institutional investor’ cited above. UHNW investors may choose to invest directly in primary PE funds, or opt for the fund-of-fund route, or the private bank-enabled closed-ended feeder fund route.
Total wealth: UHNW investors own approximately $45.4 trillion in wealth collectively2.
High-net-worth investors are classified as those whose investable wealth exceeds more than $1 million. These investors typically focus on wealth preservation and growth. They are more likely to have investment portfolios across public markets, with limited to no exposure to private or ‘alternative’ asset classes. Their investment capacity is approximately $100k.
Total wealth: According to the latest data global HNW wealth reached $86.8 trillion in 20233.
Mass affluent investors are defined as those with $100k to $1 million of investable wealth and are the least likely to have ever had any exposure to private markets. This group rely on retail banks, pension providers and financial advisors to build their investment portfolios and will typically look to invest in the range of $1k in any given opportunity.
Total wealth: According to one estimate, the total wealth of the global mass affluent segment is north of $124 trillion4.
GPs with designs on tapping in to private wealth must therefore determine which of these different target segments they intend to appeal to, as this will ultimately dictate how the fund product is engineered and distributed.
What is also imperative, regardless of fund structure/design, is that the GP ensures the investment experience remains the same, and that no corners are cut. The quality of assets in an evergreen fund should be equivalent to those in a flagship closed-ended fund.
Each of these different segments of the market have their own specific needs. Some products, like the open-ended evergreen fund, are able to cut across boundaries and appeal to all private wealth investors because of their low cost. By contrast, closed-ended feeder funds are only ever going to be suitable for UHNW and HNW investors who have private bank relationships.
Adopting one’s product offering is therefore necessary depending on what target segment the GP plans to offer it to.
As Benoir de Kerleau, Managing Partner - Global Head of Strategy at Flexstone Partners explained during the panel session “The Liquidity Equation – What’s The Right Level And Approach For Wealth Clients”mass affluent and retail investors aren’t equipped to deal with multiple capital calls, distributions, “so you need to design a product that is going to make it easier for them to subscribe to and get liquidity”.
"For the retail segment, you need to call all the money day one and offer liquidity at the level of the fund, not the asset, so that people can decide if and when to exit and ask for redemptions,” he said.
From democratisation 1.0 to 3.0
There is a noble quality to the term ‘democratisation’, which implies that private markets, as an overall investment proposition, are suitable for everybody. Some in the industry are keen to exercise caution here and stress that they should be for the many but not legion.
Some twenty-five years ago, the first wave of democratising access to private equity began when private banks started creating closed-ended feeder funds, giving UHNW investors the opportunity to pool their capital and access best-in-class GPs. This worked perfectly well for the next two decades: lots of feeder funds, lots of clients and lots of AUM. However, as Simon Jennings, Head of Private Client Group EMEA & APAC at HarbourVest Partners explained at IPEM Cannes Wealth, democratisation 1.0 “didn’t scale because the only providers of those feeder vehicles were the two handful of private banks who had the scale of demand to justify the feeder funds.”
Speaking on the panel “The Wealth Revolution – From Pioneering Roots To Mainstream Reality”, Jennings explained that the next wave of growth arose when digital platforms emerged. These platforms soon enabled different feeders to be built for different types of distributors and direct access to private investors.
“What has changed in the last five years has been the proliferation of and acceptance of open-ended evergreen vehicles. That for me is democratisation 3.0,” he said.
As secondary markets evolve and the depth of liquidity deepens in tandem with improved technologies, this will add further impetus to mass affluent adoption, enabling individual investors to exchange shares and get their money back when needed.
“Having more solutions for private wealth clients, particularly mass affluent investors, and more private banks and distributors involved, will make private markets more prevalent across the mass affluent population,” suggested Luc Maruenda, Parter, Head of Wealth Solutions, Investor Relations at Eurazeo, a leading French private equity firm.
Quality of Experience Counts
Top down, from the institutional flagship fund to closed-ended feeder fund and open-ended evergreen fund, the GP’s intention should remain consistent: build the right solution and provide the same investor experience.
When it comes to private wealth, no corners can be cut.
“Private wealth is very much like an airline that offers first class through to economy. There are different segments of the wealth market. Each segment has specific needs and expectations, and capacity to invest. Over the past five years, we’ve addressed each segment in a different way. It’s important to do that for the long term.That is the spirit with which we will be launching our new products in the next few months,” says Erwan Paugam, Head of Private Wealth Solutions at Ardian.
The cost of access might vary but the end destination is the same for everyone.
Speaking alongside Paugam on the panel session “How Fund Managers Are Adapting To Seize The Wealth Opportunity” at IPEM Cannes Wealth, Jose Luis Gonzalez Pastor, Managing Director, Neuberger Berman commented on why the firm launched its ELTIF products with a single upfront capital call: “We know based on our experience that capital calls are something that not all clients at the lower part of the private wealth segmentation like,” he said, noting that after its first ELTIF launch (in 2021) many of its competitors chose the same single capital call mechanism. Utilising the ELTIF structure has allowed the US investment firm to bring a lower cost of access to non-professional retail investors with a minimum investment of EUR50,000.
Jake Williams, Head of International Product Strategy, Wealth Management Alternatives, Franklin Templeton, believes every client type will have an allocation to evergreens from a private assets perspective.
“Institutions will see them as an opportunity to make the process of re-upping easier and with the ELTIF and LTAF, these structures will make it more accessible for mass affluent and retail investors. The evergreen fund structure will become a mainstay from an allocation perspective but the magnitude of allocations will change throughout the hierarchy of different client types,” he said.
Future Growth via Discretionary Model Portfolios
Regulatory innovations like the ELTIF in Europe and the LTAF - the UK’s equivalent regulated vehicle - have been designed to encourage individual investors to gain exposure to private markets in their retirement funds. This could accelerate the growth of discretionary pools of capital within private markets over the coming years as wealth platforms incorporate an evergreen sleeve into model portfolios, providing clients with diversified exposure to private markets as part of a strategic asset allocation.
Some private banks are already offering discretionary mandates for their HNW clients but the fiduciary bar is that much higher compared to offering advisory mandates.
“We still believe we are on a path integrating private markets into clients’ portfolios, whether it is on an advisory or discretionary basis,” remarked Jan-Marc Fergg, Global Head Managed Solutions & ESG, HSBC Private Bank, during the panel discussion “The Wealth Revolution – From Pioneering Roots To Mainstream Reality.” He added: “We focus on UHNW and HNW clients - we don’t integrate private markets in discretionary portfolios below EUR2 million.”
One of the big advantages of discretionary capital is that it is scalable. There is still some uncertainty among wealth managers that financial advisers have sufficient knowledge of private market strategies. This raises concerns that mistakes could be made by recommending too much allocation to private equity, for example, versus the client’s profile. Discretionary mandates remove that burden of responsibility on selling products.
“Discretionary solutions are a great way to propose something that has been professionally selected. Advisers could select from a small number of solutions that are scalable and which could be offered to a large number of clients,” said Eurazeo’s Luc Maruenda.
ELTIFs and other regulated structures are well positioned to support broader retail adoption of evergreens via these discretionary mandates.
Speaking on the “Understanding Evergreen Funds” panel, Victor Mayer, Managing Director and Head of International Private Wealth at Pantheon, warned that retail investors should not view evergreens as a “savings account on steroids”. These are still long-term investments.
“There is now the emergence of a number of model portfolios in some of the large banks who are blending closed-ended and open-ended offerings for their clients. You also see hybrid funds, combining public and private market assets. The spectrum of going from a pure evergreen mass affluent product to a combination of closed-ended and open-ended products is going to be quite mighty. Model portfolios, going forward, will generate persistent flows into the asset class,” remarked Mayer.
It used to be that UHNW investors were the core target segment for private markets firms wishing to diversify their investor base. The options were limited in terms of access and style of strategy. That has all changed. Investment strategies have expanded, while technology and product evolution has opened the door to a far wider set of private wealth investors.
“Now there are lots of different flavours, or choices, when it comes to private markets,” said Veronique Fournier, Head of EMEA Wealth Distribution, Apollo.
“You have access to private credit opportunities, high yield or investment grade, within equity you have access to growth, value. The ability to build a diversified private markets allocation is now there for clients. That’s the journey we are trying to take our clients on…through evergreens, through closed-ended funds, direct investments, co-investments etc.”