The Private Markets Gold Rush Needs Greater Scrutiny

Would the gold rush of the mid-nineteenth century, when just a handful of the 300,000 folks who flocked to California became billionaires, have turned out differently if the fortune seekers had retained financial advisors?

We will never know, but we can say with certainty that financial advisors have a major role in ensuring that the latest movement that could herald widespread wealth creation benefits more than just the lucky few.

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Over the past few years, the push to open private equity, private credit and other alternative investment strategies to individual investors—the ‘democratization of private markets’ as it is dubbed—has gained real traction. At the center of this drive sits the wealth advisory industry, serving as the nexus between investment firms trying to win capital from this lucrative new channel and the investors they are trying to reach.

The way this opportunity is being communicated has so far been bifurcated. On the one hand, much of the narrative is about the riches on offer. Put more crudely, the talk has been about how individuals can invest like the 1%—and reap similar benefits. The second main strand that comes across clearly in the way the media is covering the topic involves the risks inherent in private markets strategies—the lack of liquidity, high fees, and so on.

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In the latter, wealth advisors have a significant role in ensuring their clients make sensible decisions based on knowledge and awareness of the risks as much as, if not more than, the potential rewards.

In new research, we found that less than half the media coverage on the topic of democratization of private markets cited the risks involved—48%. In media dedicated to the advisory community, this was even lower, at just 43% of coverage (versus 74% in mainstream news outlets).

Advisors need to have honest conversations with their clients about the downsides of private market investing and the possible returns. We have already seen situations where private market firms have been severely criticized for failing to fulfill redemption requests, not because they were culpable in some way but because the investor base was unfamiliar with what they could expect.

More fundamentally, the wealth channel needs to get better at understanding the lay of the land—who are the main players, and what are their differences? In making their push into this emerging territory, private markets firms have been strong about education, particularly as it relates to the opportunity and the upside potential of the asset class. 

But the signs are that, to date, this is not translating into detailed knowledge of the market by the people who need to know—the customers. Various surveys of advisors and high-net-worths have laid bare a widespread lack of knowledge about investment brands in the market, let alone what those brands stand for or do particularly well. 

This is in no small part likely because, despite the supply-side growth, the opening of private markets to individuals is still a relatively nascent movement. As such, it remains somewhat unfamiliar terrain for wealth advisors and more so for their clients. Private market firms continue to roll out education for financial advisors and end investors, but it is most important that financial advisors apply that knowledge to client portfolios and outcome-oriented advice. After all, private market investments are ultimately another tool for advisors to deliver against client goals.

Wealth advisors would not put their clients into funds or products from traditional asset managers without rigorous research alongside the trust that has been built over many years.  

The latter can only develop over time. But the information void will likely be filled, at least in part, by longstanding industry data providers who are already well versed in evaluating public market funds and products and are starting to push into private markets, too. This should help ensure wealth advisory firms have the tools to help their clients make better overall portfolio decisions. 

In the meantime, wealth advisors should not be shy about asking for this data directly from private markets firms. If private equity firms are serious about tapping individuals for capital, they will have to become more accustomed to this greater scrutiny. There is no time like the present to start. Otherwise, this new gold rush will prove as much of a damp squib as the original one.

Dan Allocca is Partner, Head of Digital, Paid, and Analytics at Prosek Partners.