Hello everyone, and welcome to another episode of Top of the
OPS, a podcast brought to you by The Drawdown.
In each episode, we take a glance at a hot topic in
operations and finance within private markets, delving a
little deeper into a recent article covered on the Drawdown.
And today we will be discussing GPS attempts to tap private
wealth. Once again.
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Now my podcast partner today is the fresh faced Rivers
Cartwright to my crusty and decrepit Jackson Lamb.
It is of course, the draw Downs Deputy editor Matthias Plotz.
Welcome, Matthias. Thank you for having me.
I kind of want to say good morning, but it's noon.
No, yeah, we've just skipped over SO.
I'm not sure where that comes from, but for some reason your
choice of words is making me hungry, which is probably
because it's lunchtime. Not sure why specifically,
because again, I have no idea who you're talking about.
Yeah. And as you name it is that is
exactly the intention. So OK, we're going to move on to
today's topic, which is the standard industry marketing
jargon describes either as retailization or democratization
of private markets, but really just means methods of allowing
high net worth individuals, ultra high net worth
individuals, mass affluent, these types of wealth, wealth
investors to access private funds.
The PR around this makes it seem like a match made in heaven.
And certainly there has been an increasing number of Evergreen
vehicles being launched over the last couple of years.
But what sort of operational challenges are being created by
the tapping of wealth channels? And are the predicted levels of
investor appetite, particularly over the long term, realistic?
I think the the investor appetite is definitely there.
We've seen enough of surveys and reports which kind of confirm
that with the caveat that you you need to be aware that this
is a possibility. I think there is still a large
part of education that needs to be done on that.
Yes, this is now an asset class you can that that is open to you
and there are specific products like the LTF or otherwise to
facilitate that access and how it can be done.
But the biggest challenge still and especially kind of for our
mid market readership is absolutely.
So the sheer volume of investors and the kind of associated work
that you need to do around subscription and onboarding.
And I personally suspect that this is in part why the
Evergreen vehicle is of such a great interest at the moment,
because you will, the way I've seen them set up in most
instances is with a server cornerstone investment from your
more traditional LP base that doesn't have the, you know, the
associated liquidity question attached to them.
And then alongside them, you have kind of a pool of of
private wealth investors where you you give them a bit more
that that's if you're flexible investor pool that will come in
and out in in theory. And I know that that the
liquidity question kind of taps onto that.
And I've seen most of those funds launched with this sort of
a two year lock up period. And and then the, the
redemptions are open, but Evergreen that as much as it is
a possibility, the operational infrastructure that you need to
to run those vehicles. In particular, you spoke to a
lot of advisors and firms who run them earlier this year For
my cover feature on feeder funds is that Evergreen vehicles take
a long time to actually take off it.
They're sort of something that you set up and then it it takes
a whole lot of time to mature, which if you are a large
investor, obviously that is something you can accommodate
for with your own balance sheet. But if you're a smaller investor
who kind of, I guess also has more immediate needs in terms of
management fees to keep your own operations running, you don't
necessarily have the waiting time that others may have to to
until that fund sort of appreciates to a critical mass.
Yeah, I want to say. Yeah.
So you're, you're illustrating quite nicely there some of the
tensions right around operational burden and also
investor relations and investor expectations, which all those
complications are what we love to dig into.
We're at somewhat of a disadvantage today because the
author of our recent article on this topic, our intrepid
reporter Tanya Kuchel, is actually currently sightseeing
in Madrid. Lucky her.
But it just so happens we have an interviewee who is very well
placed to provide some insights. So I just spoke to Tim Ball of
Schroeder's. So let's listen to that
interview. I'm delighted to be joined now
by Tim Bull, who's the head of product Management for Schroders
Capital. As part of his role, he leads on
helping private wealth managers gain better access to private
assets via Schroders platform. And Tim, you know, I've seen
some of the stuff that you've written that's out in the
market. You previously said about how
there is a growing appetite from individual investors and wealth
managers for private assets, partly driven by that promise of
higher returns, but also because so much of the economy now can
only really be accessed via private markets.
And I guess on the other side of the transaction, private market
managers are in this prolonged period of difficult fundraising.
And so, you know, we're they're very keen to access this
previously untapped pool of liquidity.
But challenges still remain, right.
So not least around the education and understanding of
the products being offered by managers such as Evergreen
structures. But Tim, you're very much at the
frontline of this, so very keen to hear your view.
I guess to start off with on what the biggest challenges that
kind of remain for GPS who are attempting to chat wealth
channels? Sure.
Well, thank you very much. Real pleasure to be to be
featured. I think that there are there is
still a number of obstacles which you know people are
addressing. And I think we also miss
recognize it's the market is very heterogeneous in the sense
of, you know, every market requires slightly different
approaches and in terms of accessing it.
And when we talk about the wealth space, we also kind of
tend to sort of mix up very different client types within
that. So maybe just by first by start
setting out what we would how we would define the market.
I think you've got those investors which are kind of
single family office, you know, almost closer to institutional
type investors. And then you go down through the
multi family office, the ultra high net worth, high net worth,
and then, you know, ultimately arriving at what we call kind of
the mass affluent. Now, all of those different
types of clients have different requirements and different means
of being able to access it according to regulation,
according to the, the, the wealth partners, the, the, the
intermediaries, the private banks and so on and the
financial institutions that they, that they work with.
So it's a very diverse market and in every country or every,
every jurisdiction tends to have different considerations when
you want to, when you want to provide access to your products
in those, in those in those countries.
The way when I think about, you know, how the market has
developed over the past few years and what I, you know, when
I think forward in terms of what's, what, what are kind of
the key things that we need to get right over the next few
years. I mean, regulation has come a
long way when I think back over the last 10 years and that's
certainly been a great facilitator for some of the
growth that we seen in the market.
And I think regulators also recognize the importance in
setting up right framework so that investors can access
private markets. It's in no one's interest to
completely block and prohibit investors that, you know,
eligible investors from being able to access these sorts of
financial products. And often, you know, if you, you
know, the, the way that the economy is changing, as you, as
you mentioned, it's important that investors, you know, wealth
investors are able to access similar sorts of opportunities,
which institutional investors have been able to do for many
years. So regulation is a key one, but
a lot of progress has been made. I think the other aspect that
you also touched upon is the educational aspect.
And this is 1 where we see again, different types of
clients have different sort of experience and different levels
of understanding. For me, the most important thing
is, is that the investors that we are speaking to and that
we're offering private markets products to have an
understanding in terms of, you know, the liquidity risks.
Because that's typically where problems have been had in the
past in terms of people misunderstanding in terms of how
quickly they could get access to, to, to those products.
And there are certain things that are designed within the
products to make sure that investors can't, you know,
almost sort of react in an impulsive way to be able to sort
of, you know, typically, you know, you know, exit the product
immediately and therefore, in some cases sort of imperiling
some of the other investors in the fund.
So there's a, there's a whole education piece about how people
think about how these products are used in part of the overall
portfolio. And then I think the other final
piece would be the operational aspects.
And that's where the industry is also making changes.
But again, depending upon the country, you see different,
different markets and depending upon the, the mutual fund
infrastructure that you're working with have been able to
accommodate some of the, the features or the characteristics
of these funds. Such as, for example, you know,
monthly, monthly subscriptions or quarterly subscriptions and
redemptions. The, the, the, the frequency of
information that is available and whether, for example, in the
event of, you know, many investors looking to, to redeem
from a product, the, the concept around this redemption gating,
which is a common feature across many, many of the Evergreen
funds that we see in the market. So I guess if I was to summarize
it, a lot of progress has been made, but you know, still, you
know, and the opportunity is definitely very interesting for
both, I think for, for managers and also for investors.
But it's also, you know, there's still a lot of progress that
still needs to be made for before we can say that, you
know, it's completely an open, you know, Open Access.
Sure. Yeah.
Let's dig into a few of those challenges that you mentioned
there. So looking from a European
perspective in terms of the products that are available to
and you may have a nuanced view in terms of different types of
investors as you've you've laid out previously.
But in terms of the products that are on offer, are they
sufficient to kind of reach the targets of fundraising around
wealth channels that you know are often kind of stated, you
know, the ambitions that are out there?
Do we have the products yet? If we do, are the products well
understood enough yet to be able to unlock that capital properly?
What's, what's your perspective, as I say, from a European
perspective? Sure.
But I think you've seen a, you know, huge explosion in terms of
the number of funds launched in the last really the last 18
months. So, you know, some of your
listeners may be familiar with the the LTF rules, LTF 2.0,
which was sort of the second generation or, you know,
iteration of, of the rules around these European long term
investment funds. And that's certainly herald in,
you know, a big increase in the number of new funds that were
launched. And we've seen that across the
market. So I think there's certainly a
lot more variety in choice available to investors, which I
think is, you know, definitely a positive.
I think, you know, ultimately what we, we tend to see I guess
a slight sort of, you know, congregation of, of certain
types of strategies and certain types of, you know, product
features. So many of the funds that have
been launched, you know, in the recent recent months have been
Evergreen funds really sort of which taking advantage of some
of the flexibility that the LTF 2 rules brought in.
I would say there's also been across the asset classes,
there's been probably I think when I last looked at the data
about 1/3 have been sort of private equity focus, 1/3
private credit and about 1/3 infrastructure.
So I'd say those are the three dominant asset classes where we
tend to see the most activity. Real estate I'd say has tended
to be kind of less, less dominant, I think partly because
real estate is often long been a feature of, of investors
portfolios and real estate is often I guess has been sort of
provided for in more sort of typically local structures, so
country by country type structures.
So we have generally found that the demand for real estate has
been sort of more muted compared to some of the other asset
classes. But I think that was also, I
think there was also a bit of a cyclical, cyclical aspect there.
And I think, you know, we, we have begun to see more interest
in real estate strategies, you know, in the very recent months.
So you would judge kind of the the amendments to the eltif
regime because of the the number of vehicles launched those that
eltif 2 point OF it has in your view been you know largely a
success and is is kind of meeting the need in in the
pockets where there is demand at this stage?
Yeah, I think it was definitely a big, you know, big step
improvement. I mean under the previous LTF 1
rules, you know, the restriction to closed ended funds only, you
know, I think kind of probably made sense in 2015 when the LTF
rules were first published. But given how much the market
has has developed and the innovation we've seen on the
product side, I think, you know, it was important that the LTF
rules were updated to to accommodate Evergreen
structures. Yeah.
Our focus here at the Drawdown is very much coming from a
operational as well as finance perspective.
So let's talk about managing that.
Some of the stuff that you you mentioned previously managing
the volume of investors within those strategies, you know which
is not something that private credit, private capital managers
have had to deal with previously.
How do you see that? Where are we in that evolution?
Have have you know, the the people who are kind of leaving
the market on this? Have they got that kind of
smooth on boarding process cracked?
Are there still, you know, aspects that need to be ironed
out in terms of communication and reporting?
You know, where, where are we? Are we, I imagine, you know, you
kind of highlighted at the beginning, there's still a
learning process going on here, right?
Yeah, that's right. I think.
I mean, I think you know where it started.
I think, you know, where, you know, managers first started
sort of proposing funds to that sort of wealth type of client.
You know, typically, you know, it was almost trying to address
the immediate problems, which is a whole sort of subscription and
onboarding process. And typically they tried to do
that by setting up a feeder. It kind of meant that they
didn't have to do it if someone else was doing it.
And typically, you know, some of the digital platforms that we've
heard about now that we see in the market quite regularly were
kind of key in terms of facilitating that access.
So you know, that that was, I'd say the first step.
You know, inevitably, you know, that kind of helped a little bit
in terms of managing things such as the capital pools, the sort
of, you know, fairly, you know, you know, complex sort of
subscription process where you have to really sort of, you
know, take invested through complicated subscription
documents. But it didn't really give, it
didn't really address the full needs of the sort of clients
that we're thinking about here with what the wealth clients.
And that's really where I think the Evergreen structures have
really probably taken that that next significant step by
building upon really the mutual fund infrastructure.
So, you know, this was rather rather than approaching it from
the perspective of, you know, a private markets manager, you
know, typically, you know, would set up limited partnership
funds, you know, taking kind of, you know, an incremental step
kind of to sort of open up that process to wealth clients.
I think, you know, where you take it from the mutual fund
infrastructure, you'll miss work from the other way.
So you say, OK, so how do wealth clients tend to access
investment securities or investment funds at the moment
using, you know, many of the platforms that are available,
the, you know, the ones that are typical with the, with the
standard usage funds or other social mutual funds and thinking
about how we can build a private markets strategy using that
existing architecture. And I think that's where we've
seen the most success because for the, for the, for the wealth
managers, for the private banks, it has allowed them to really
sort of, you know, be able to offer these funds without
necessarily having to sort of, you know, create new, new
complex operational steps and processes around it.
So for a, you know, for a private bank that is already
offering, for example, global equity funds or regional,
regional fixed income funds, you know, to be able to offer
private markets fund using their existing service partners on
the, you know, on the, kind of the, the trading side or the,
you know, the, the, where they get the, the market data from.
It's, it's all there. It's a case of just being able
to sort of really extend their shelf to include private markets
funds. Yeah.
I guess we're always concerned or interested in the
capabilities of, I guess managers less progressive along
the maturity scale. You know, obviously it's the
largest managers who are doing this at the moment and have kind
of pioneering this. How attractive that additional
kind of operational lift is going to be to to kind of mid
market managers potentially in the future And what do you have
a a perspective on that? Yeah.
I mean, I think it's look, I mean you, you know, you're
definitely right in that, you know, you tend to see some of
the largest managers that are most active in this space.
I think partly that's partly a consequence of brand being quite
important. You know, so I think we tended
to see sort of, you know, and especially, you know, I'd say in
certain markets, like in Asia for example, branding is is
especially important. I think the private bankers, the
wealth managers that, that operate in Asia take a lot of
comfort from being able to kind of, you know, to to offer their,
the, you know, the well known, well established private market
managers to to their client base.
We have certainly seen some smaller managers beginning to
launch funds. I think the greatest challenge
though is scale really. And I think you know, maybe sort
of, you know, six years ago when we when, when we launched, you
know, one of our first Evergreen funds and in the private equity
space, you know, I think there were very few funds to choose
from. And, and really we saw kind of
incremental growth, you know, over time as more investors kind
of came in. I think now for a Evergreen
strategy, you really have to sort of almost start it with,
with, you know, at least 100 million of, of AUM, ideally
larger. So I think there's almost this
sort of this, this shift of people kind of really focusing
upon, you know, going for, for funds which are well established
in terms of size. And that will make it harder for
for for the smaller managers that either don't have the
balance sheet or they don't necessarily have the sort of the
partnerships with private banks or wealth managers in order to
be able to kind of get that sort of anchor investor or
cornerstone investor at the beginning.
So, you know, there are some considerations which I guess
have kind of increased the hurdle or increased the sort of
the the entry barriers for some of the the smaller managers.
But you know, I think we do see especially, you know, coming
back to the L TIF regime, you know, we do see in certain
markets where you know, it's either the sort of the there's a
fiscal situation, for example, the tax benefit for being able
to offer very sort of niche type strategy.
So so for example in Italy. There are certain tax benefits
for investors that invest in Italian focused strategies and
that certainly helps some of the local managers in that market.
And again, we also see in France with the unit linked insurance
market, there are certain sort of structures in order to be
able to has to be a French structure in order to be able to
tap into that client base. And that's also I guess has been
to the benefit of some of the French managers.
So, you know, on a, on a, on a global basis, I would say
definitely sort of the larger managers have the benefit in, in
the bigger scale and the balance sheet.
But we do also see some some success with more sort of, you
know, specific or specialized type managers that have been
able to tap into the wealth market as well.
OK, great. Finally, Tim, I just wanted to
touch on that, that sticky question around liquidity and I
guess you know connected to that education around products as
well. Do you think that expectations
around liquidity and what managers ideally would like to
offer, do you think there's alignment there at the moment?
Do you think there's still work to be done in terms of either
side kind of sealing ground in terms of how realistically how
often you know redemptions are going to work or or other
liquidity mechanisms? Yeah, it's, it's definitely a
key question. I mean, I can give you 2
reference points. 1 is, I guess from, you know, our own, our own
experience with our own funds and the investor behavior.
And then I think, you know, the broader perspective as we think
kind of going forward. I mean, I'd say in terms of our
experience, we, you know, when we launched our private equity
Evergreen fund about six years ago, we, we within six months,
we had COVID. We were pretty nervous about how
investors would behave. You know, I think on the whole
we had, we said we saw very little change in redemption
levels. We then had the Ukraine crisis
and then a few months later we had the Guild crisis.
In both instances, we were a bit nervous whether investors would
start to panic. I'm pleased to say that in, you
know, in none of those situations did we see sort of
investor redemption activity, you know, have a noticeable
change, I think partly because of the liquidity mechanisms that
people have generally built into these funds.
So for example, you know, having to provide, in our case, it was
three months notice for an at least three months notice for an
investor to leave meant that investors tended not to see it
as a sort of ATM as as people sometimes describe it.
So it's not, it didn't provide an immediate sort of exit route.
So investors were having, if they wanted to redeem, we're
going to have to make the decision about a price that
well, they'll be trading on a price in three months time.
So I think there's one factor. I think as we go forward, the
concern around, you know, are we are investors making the
decision with, you know, having the right expectations around
liquidity is a key 1. And that's really when it comes
down to, you know, making sure investors are provided with the
right information, making sure the selling process is, is
appropriate. Because the last thing I think
anyone wants in this industry is a is another mis selling
concern. I mean, I think, you know,
financial services, you know, over, over the past has had sort
of, you know, they've been very instances of, you know, mis
selling issues and you know, it's in no one's interest to
have that. So it's really important that
you know, both the end investor, but also the wealth managers are
kind of provided with all of the information about when it comes
to, you know, needing liquidity, what the various points are.
And and at the end of the day, I think these products are best
suited for long term savings plans.
You know we still say that even though this fund has sort of
quarterly redemptions, you should still think about it in
terms of five year type hold. And so that suggests, you know,
there's been increased regulatory interest around this
question of potential MIS selling you would you would
welcome that right for adding additional transparency and
understanding across the market. Yeah, I think it's, I think it's
really important. I mean, we've had, when we
launched some of our Suns, you know, especially at the
beginning, the regulator was, you know, very interested to
understand the, the, how the liquidity mechanisms worked.
I think, you know, regulators have got a bit more comfortable
with the number of funds that they're seeing in the market and
also how many of those funds have been able to, how to, how
they've been able to operate through various times of, of
market tension. You know, investors should be
able to, well they should understand that when they invest
in, in these sorts of asset classes, they are ultimately a
liquid and and therefore they should be doing it with the
basis of a long term, long term horizon.
Absolutely, Tim, I think we need to wrap it up there.
But thank you so much for taking your time to to chat today.
Thank you very much. Mathias, you were sitting
listening to that interview as it was being recorded.
What are your initial thoughts? I think the thing that stood out
to me immediately was kind of the as a geographic differences
in terms of attitude towards private market investments.
I'm going to call it as someone who was born and raised in
Germany and spent the 1st 19 years of his life there.
There is AI want to say cultural aversion to more complex
investments. I think partially that might be
because the part of Germany that I come from is a bit more
traditional, but also because of the so the consequences of 2008
and the GFC and, and what they did or how to play it out in the
country. On the other hand, you have
countries like France where I think the whole retailization,
democracy and democratization conversation is almost not
happening as much as it is, especially here in the UK.
But that is because private wealth and private banks have
been part of P invest investor portfolios for a long time.
It's not really a novelty there. Yeah, there might have been
through the Eltive or other products that might have been
some sort of tweaks and changes that make it easier.
But it is not a a new conversation that firms in in
the market are having. And I think if you look at
someone like Altia, I believe that for their last four funds
always had so I think 20% private wealth investor base.
Don't quote me on any of those numbers.
That conversation happened a while ago.
I think that that is quite interesting.
And at the same time you where you have geographic differences
in the investor base, you also have geographic differences in
in terms of the products. So when the LTF 2 point O came
around, I looked at the ESMA register which lists every
single LTF that has been launched.
And. Quite helpfully indeed.
Great resource. Please keep that up.
But they also tell you where it's been incorporated, shall we
say. And obviously Luxembourg is the
forerunner and I don't think that will change anytime soon.
But a sizeable amount of them often sit in either France,
Spain or Italy. And that's partially to I think
what Tim was alluding to is that within those countries there
then very specific national investment strategies which
either help you kind of from a tax structuring perspective or
from an educational perspective just of incentivize investment
there, which can then benefit I guess also that the broader
economy in those countries. Yeah, I guess it's, it's
important to clarify why we're kind of interested in digging
into this topic because as you say, actually the the the
fundamentals of it aren't necessarily that new, but what's
new is kind of the, the volume of activity and kind of the
spread of it. And I guess we're quite
interested in how deep that goes to the moment and how deep it's
likely to go. And you know, it's, it's largely
the preserve of large cap managers, right.
I've seen some data recently which suggested that, you know,
over half of Evergreen private credit AUM, which this report
put up just over $500 billion, half of that is controlled by
the five largest GPS and the top 20 managers control more than
80% of that market, right. So it really is the biggest guys
who are, you know, really aggressively going after this.
And there's very good reasons for that.
As kind of Tim alluded to a little bit.
You know, you know, there's that brand recognition, they've got
the extension distribution networks, the product
development capabilities also needed to launch and scale these
products. And that they've got the
resources, they've got the talent, they've got the capital,
they're able to build the systems that are required to
kind of address some of these operational needs that we're
talking about. Yeah, there is.
If I can jump in there because I kind of I looked at this, I
think I mentioned it in the intro as well, but I looked into
feeder funds earlier this year precisely because that was a
point that Tim made is that feeder funds were sort of the
first prototype or step in the evolution and then the first
iteration and Evergreen sort of are the next step.
And I think for a lot of the mid market, they are, I don't want
to say stuck because that implies that it's sort of their
fault, which it isn't. But they're kind of still stuck
on the feeder fund level because they don't have the scale to
operate the feeder fund due to all of the reasons that you just
said, no, sorry, not the feeder fund, the the Evergreen fund.
But for them Axis I think is still very much restricted to
making use of a feeder fund through a partnership with a
private bank or a larger asset manager that does all of the,
the grunt work, shall we say, that has the resources to do it.
And then the the mid market GP can just invest that capital
through their own fund. We've probably waffled on for
too long. I think we've that's probably
about as enough time as we have for this episode.
Thank you, Matthias. Well, thank you, John.
It's been an absolute pleasure. As always, thank you to our
sponsor HSBCIB, and thank you to everyone for listening.
Until next time, see you soon. Bye.