Trends Watch: Private Markets

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Alec Garza, Managing Principal & Co-Founder, Evolution Private Investment Collective.

What is your outlook for investing in private markets?  

Now is a great time to be allocating to private markets as an individual, if done appropriately. We believe that private markets offer a material return premium over public markets generally, as shown in historical return data. This return premium comes in exchange for the illiquidity often associated with private market investment opportunities. For example, in private markets you can achieve yields through collateral-backed lending in the 8-10% range versus a public market junk bond yield of ~4%.

We’re also seeing tremendous value creation in private companies via venture capital and private equity strategies long before these companies go public or are acquired. That said, the higher return potential does not come without unique risks. To mitigate these risks, we believe that individuals should focus on identifying specialist managers operating in niche areas of private markets. It’s these niche areas where we believe the opportunity for true alpha exists.

Despite a pullback in 2020, private market fundraising activity over the last five years has averaged close to $1 trillion per year. Most of the capital being allocated to private markets today comes from large institutions (pensions, endowments, foundations). This fundraising activity is another endorsement of private markets, specifically for the return potential and the benefit of diversification that certain private market investments can have in a long-term portfolio.

What opportunities are available for advisors to invest in private markets?

Independent financial advisors are fortunate that they have the flexibility to explore various private market products on behalf of their clients.

However, the existing infrastructure that underpins private markets accommodates large institutions while simultaneously acting as a barrier to entry for advisors and their clients. We most frequently see individuals and advisors pitched a story of access, particularly from the large incumbent players which, in my opinion, only solves a small subset of their needs. Whether it is a pure access fund capitalizing on the largest, best-known private equity managers, or a technology platform that lowers minimums through aggregated buying power, we believe that the existing solutions targeted toward advisors and their clients ignore the reality of advisors and their business model.

As former advisors, we struggled to find a solution that accommodated clients’ legacy portfolios while also providing scalable investment opportunities in niche areas of the market. These challenges can be solved through simple and customizable strategies that create a win-win scenario for advisors and their clients. Clients benefit from a diversified investment in private markets based on their portfolio objectives, and advisors benefit from a strategy that can be implemented across their varying client base without significantly increasing overhead.

What are some of the challenges advisors face when investing in private markets?

First and foremost, advisors need to be able to confidently approach their clients with a private market solution that makes sense and meets their fiduciary responsibility. Based on our own experience working with clients, here are some challenges faced by advisors when considering private market investments:

• Complicated strategies that are time consuming to underwrite – Private markets cover a wide range of asset strategies, from private credit to real estate to venture capital. Advisors are already tasked with understanding complicated estate, tax and financial planning information. It quickly becomes untenable to spend valuable hours evaluating one-off private investment opportunities, which is a requirement when making investment decisions in private markets.
• Limited access to quality opportunities – Through a combination of regulation and historical norms, quality private market opportunities are just not made available to individual investors.
• High minimums – Most private market funds have stated minimums ranging from $1 million to $10 million. Even with an eight-figure net worth, allocating to a single investment at this scale carries significant concentration risk.
• Reporting optimized for large institutions – Advisors and their clients have different reporting needs than large institutions. But, since large institutions dominate private markets, the unique needs of advisors are almost always overlooked.
• The need to maintain allocations – Since most private market opportunities have a defined liquidation term, investors need to always be aware of the next opportunity to maintain a consistent allocation. Given the access challenges previously mentioned, without a team dedicated to sourcing new deals, it’s exceedingly difficult to maintain an allocation.

What keeps you up at night?

There are always unknowns in the markets, but these unknowns are what create opportunity. Recently, I’ve been thinking about the long-term psychological impacts of the COVID-19 lockdowns, especially as we start seeing some semblance of normalcy following successful vaccine rollouts. On one hand, shifts in real estate preferences, particularly regarding the use of office space, and the accelerated shift of consumer spending online can create opportunities. On the other hand, these shifts could change the outlook for strategies that once were profitable.

I’d also say the abundance of capital at the high end of the market is generally concerning. It’s possible mega funds will start moving down market in search of opportunities to deploy their large swaths of capital. Should this occur in a meaningful way, it’s reasonable to expect heightened competition and diminishing returns. We are starting to see this pressure in the venture market where valuations at the earliest stages continue to rise.  

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.