William Vettorato: Private Equity Still Has Plenty to Learn About Wealthy Investors
Although many are rubbing their hands at the opportunities afforded by wealthy investors, the industry still has lots to learn. William Vettorato explains.
Let’s start with the big question. What is a “private wealth” investor? In the modern world, they can look like pretty much anyone. They might be the young entrepreneurs who just sold their first business or the matriarch of a multi-generational industrial dynasty. They could be wealthy families concerned about transferring wealth to the next generation or heirs already enjoying that fortune.
As these modern investors do not necessarily conform to the old-fashioned image of an executive golfing with their banker, more diverse types of investors need strategies that reflect their own realities. The era of conventional one-size-fits-all portfolio is now well and truly over.
Nevertheless, literacy and awareness of the types of products and financial vehicles available to modern investors is increasingly high. Unsurprisingly, therefore, individuals are typically much more engaged when it comes to investment decisions involving their own wealth.
Investment professionals with new products to sell must remember that in this environment, any proposals will be highly scrutinized.
So what does this mean for private equity strategies?
Much has been written in recent years about the growing investor interest in alternative investments like private equity (PE). As “private” has been the operative word for the industry as a whole, there is a great deal that still needs to be understood about direct-to-consumer investments. Mostly, this means understanding what investors actually care about and what’s just more noise.
Cutting straight to the point, first and foremost, they look for performance. It doesn’t matter how diverse this group is, most will simply ask: “What return can I expect on my investment?” Although many shy away from saying it, this is the all-important measure for most investors.
The next big question to answer is: “What’s the risk?” Whatever this performance multiple is must then be adjusted by the potential for things to go awry. This in turn must be considered against any diversification benefits it can bring to the portfolio. In addition, many prefer fully paid-in funds, which reinvest distributions, deliver continuous vintage exposure and offer partial redemption features. This is why evergreen funds are gaining so much popularity. Fundamental, however, is the investment experience: private wealth investors are allocating their own wealth and expect a qualified offering.
“The reality is, that Adam Smith’s invisible hand doesn’t miraculously appear, adding a sprinkling of extra performance to an investment just because it is illiquid. ”
According to analysis by Hamilton Lane, private equity and private capital, historically have promised overperformance vs. public equity. This was often justified by the liquidity premium. But the reality is, that Adam Smith’s invisible hand doesn’t miraculously appear, adding a sprinkling of extra performance to an investment just because it is illiquid. Illiquid investments can overperform liquid equivalents when the holding period is used to create value. In fact, private capital overperformance is best delivered via a careful sourcing process, a strong corporate governance structure that aligns interests between management and ownership and a performance-focused value creation plan leveraging on specific sectorial and industrial expertise.
However, when selecting the right manager, the performance of the resulting portfolio will be much more dependent on the selected portfolio companies and their specific value-creation strategies and far less on generic macro factors. Here diversification is something that can be looked at in a new way.
Traditional closed-ended funds, the product of choice for large institutional investors, require minimum investment sizes and capital drawdown schedules which are, respectively, too high and operationally cumbersome for private wealth investors. The first element of flexibility they require is, therefore, a fully paid-in fund. Secondly, they require flexibility in the form of regular subscription windows and partial redemption features.
New evergreen product offerings are designed just to satisfy these needs, giving individuals access to fully paid-in, already deployed portfolios, well-diversified across a wide range of investment stages.
There are many evergreens available in the market and more to come. We see this as a positive since it gives private wealth investors multiple products to choose to target their risk-return objectives. However, it is important that everyone helps to educate the wider market and potential investors by clearly describing the partial liquidity feature and reminding them that value-creation strategies take time to deliver the results: private capital remains a long-holding investment strategy.
This could be a pivotal moment. Private wealth investors are banging at our doors to get into a world that has previously only been accessible to institutional investors. It is safe to say that while there is still a lot of work to do, the next few years promise to be exciting for PE investment professionals and wealthy investors alike.
William joined EQT in April 2023 as Head of Fund Strategy from Partners Group, where he had been the Senior Portfolio Manager of their Global Value SICAV fund in addition to being responsible of the portfolio management of key private wealth management offerings (ELTIFs, master-feeder structures, joint-initiatives).
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