Could private equity exposure anchor clients in choppy markets?

Private markets expert and CEO argues advisors with more choice in product selection could have an edge

Could private equity exposure anchor clients in choppy markets?

As a dimmer market outlook puts client-advisor relationships to the test, portfolio managers with access to private equity could have an advantage, says one chief executive.

“I think right now, we’re seeing the importance of having private equity and growth equity exposure to attract or retain clients,” says Marcus New, founder and CEO at InvestX.

A leading private equity marketplace, InvestX empowers broker-dealers to invest in pre-IPO companies through single-issuer SPVs, multi-issuer funds and secondary market trading.

“Advisors and portfolio managers, especially in the high-net-worth and ultra-high-net-worth category, regularly tell us how they use our products to get new customers from other firms,” he says.

‘Recessionary psychology’

The long-drawn bull market of the past decade-plus, New notes, has enabled countless advisors to achieve the kind of returns that would satisfy any client.

But with the days of generating portfolio returns of 10% or more through public markets seemingly at an end, the number of clients looking to move their assets elsewhere has risen markedly. A global wealth research report published by EY in July found 45% of Canadians surveyed were planning to add, switch, or move service providers in the next three years, compared to just 21% with those same intentions in 2021.

From New’s perspective, the number of clients breaking up with advisors could accelerate as a “recessionary psychology” takes hold across the markets.

Higher interest rates have crimped public technology companies’ ability to achieve growth, while commercial real estate investments have also struggled amid the entrenchment of hybrid work culture across professional service industries. Mega-cap public tech names like Alphabet and Meta continue to capture investors’ attention, though he argues that they’re “cash machines” rather than true growth names.

“From a trend perspective, what we’re seeing is that growth only exists in the private market … it does not exist in the public markets,” he says. “If you want growth, you have to be in the private markets. Advisors, wealth managers, and portfolio managers all recognize that.”

The power of product selection

He says members of Tiger 21 – a peer network of ultra-high net worth investors and entrepreneurs – have a 40% allocation to alternatives on average, with the lion’s share being in private equity. And because access to information online has made clients more sophisticated, the demand for exposure to non-public market options with diversification and potential growth benefits has only increased.

“We have 4,000 limited partners in our network … product selection is a massive issue for them,” New says. “If an advisor is limited by their firm to a standard, very narrow product set, they’re at much more risk of having a client leave.”

Regulators might have been well-intentioned in encouraging traditional balanced allocations – most notably the 60/40 portfolio – for typical retail investors. But with more sophisticated investors getting broader access to alternatives, New argues that a large swath of the retail market is at risk of getting left behind.

“We’re seeing the wealth gap continue to widen along with this gap in product selection. I think firms really have to deal with that reality,” he says. “There’s a lot of hesitation because of perceived risks in alternative investing, but most of the risk around private equity is around the time horizon and not having the ability for daily liquidity … it’s not about risk to the companies themselves.”