As fee pressure persists across the investment-fund space, the task of capturing market share and investor dollars is becoming ever more challenging for asset managers. Some players are moving laterally, exploring potential opportunities in alternative investment funds; index-investing behemoth Vanguard is reportedly looking into offering diversified access to private-equity investments to its clients of its advisory services.
“We will only go somewhere if we think we can do it better for [clients’ portfolios],” Vanguard CEO Tim Buckley said.
Other asset managers have also spoken out, saying make sure retail investors are not left behind in getting access to private investments. But according to Preston McSwain, managing partner and founder of Fiduciary Wealth Partners in the US, there are important questions to consider.
In a commentary published by the CFA Institute, McSwain noted that private-equity return charts published every quarter highlight “net to limited partner” returns. He acknowledged that PE investments may perform better over some periods of time, but asked why net to limited partner returns are compared to public indexes even though fine print in disclosures discourages direct comparisons “due to the fundamental differences between [how private equity and public market returns are calculated].”
While disclosures do typically provide other metrics to allow more accurate comparisons, McSwain suggested that such “actual private investment returns” are not received by any client — a fact that some firms don’t disclose, even in the small print.
He also took aim at the ways in which PE returns are calculated. Potential investors might not understand the ramifications of statements like “The timing and magnitude of fund cash flows are integral to the . . . performance calculation.” He also made note of so-called “fund level engineering” that can “optically boost” limited partner returns — which, McSwain noted, might already be inflated based on work reported by academics.
“[A] form of this return engineering ‘could potentially lift [returns] by 3% or more’ … beyond returns that might already be high as compared to the actual cash-on-cash returns that investors may have received,” he warned.
Given the different ways in which private-investment returns can be determined and presented to accredited or sophisticated investors, McSwain argued that complex, multi-dimensional analysis is necessary to truly evaluate private investments. The question is whether retail investors that receive access to PE are equipped with the background and resources needed to perform such analyses.
“[M]aybe access [to private investments] should be accompanied by clear warning labels,” suggested McSwain.
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