As private markets become more democratic, a conference focuses on the challenges of this asset class, its costs and its liquidity.
Private markets are on the rise. This asset class, which includes private equity, private debt, infrastructure and private real estate, is growing rapidly both in the United States and in Europe. Assets under management exceed $10,000 billion, which corresponds to approximately 10% of global market capitalization. The consultant Preqin predicts a doubling of assets in private equity over the next five years. The picture is identical in private debt. This market has quintupled since 2007 to reach 1,500 billion dollars. However, Switzerland is late. These markets are “a little underdeveloped in Switzerland” compared to France or the United Kingdom, observes François Mollat du Jourdin, founding president of MJ & Cie, a family office based in Paris and Geneva, during the Private Markets conference. Insights, organized Tuesday in Geneva by Voxia and Allnews.
In MJ & Cie’s overall allocation, private markets represent 50 to 60% including real estate, specifies François Mollat du Jourdin. As the latter’s clientele is very wealthy, the liquidity constraints linked to private markets do not constitute a particular constraint.
“The remuneration demanded by certain managers (management and performance commission) is sometimes quite high.”
Private markets were initially aimed at wealthy individuals and institutional investors. Their access to private clients has gradually been facilitated, including with the help of new regulations such as those which have been applied to ELTIF funds since the beginning of this year – we are talking about ELTIF 2.0 funds for this new format -. Currently the highest allocation in private markets is that of the Yale University Endowment with 75%. It amounts to 35% for family offices and less than 5% for private investors. The allocation reaches 30 to 50% with Bedrock Group, according to Neil Benjelloun Senior Vice President at this multi-family office based in London, Geneva and Monaco, specializing in the selection of private equity funds as well as in co -investments or direct real estate. “The main thing is to adopt a disciplined, methodical approach and to invest regularly in this asset class,” he says.
The challenges to be met
However, private markets are not unanimous. “Our allocation reaches 2 to 3%,” says Kim Muller, CIO of wealth manager Pleion, in Geneva. Its restraint is fueled by the liquidity constraints of this asset class. Cash flow management and the investment process are indeed demanding and complex. In private markets, the investment process is long. You must first demonstrate great discipline,” insists François Mollat du Jourdin. Several years are required to deploy the capital.
Sometimes it’s a generational problem. An entrepreneur who retires and sells his company is more sensitive to the particular profile of private equity than a private investor at the start of his career. With Pleion, the investment in these instruments results from specific customer requests. On the other hand, at Bedrock, the allocation to private markets is fueled both by the demands of the investor and by the advice of the managers. “We are proactive on this subject and at the same time attentive to customer needs,” explains Neil Benjelloun.
“Assets under management exceed $10,000 billion, which corresponds to approximately 10% of global market capitalization.”
While many are establishing multiple initiatives and new products in this asset class, Pleion does not highlight it in its marketing strategy, indicates Kim Muller: “We keep up to date with the latest developments.” Access is becoming easier and the number of eligible clients has increased, but these are instruments that must meet the risk profile and needs of clients. An educational effort is necessary, in particular to explain the illiquidity of these markets, notes François Mollat du Jourdin.
Alongside return and risk factors, liquidity is a major criterion to take into account. “Not all clients are ready to accept the illiquidity of these instruments,” he says. François Mollat du Jourdin clearly expresses his restraint in the face of the democratization process currently underway. “Hyper retailization”, that is to say an exaggerated democratization, risks turning against this industry. He argues in favor of an approach reminiscent of ALM management (asset/liability management) of pension funds, in order to properly control liquidity issues. Kim Muller is also worried about the risks of too much democratization.
An investor’s reluctance should, for example, lead him to favor certain market categories. Private debt makes it possible to generate flows, unlike private equity. Obviously, the assortment of instruments is extremely wide.
Pricing is another challenge. The investor must know all the charges of the instruments in which he invests. However, the remuneration demanded by certain managers (management and performance commission) is sometimes quite high. If a performance fee of 20% is added to a management fee of 1.5%, the total risks rising to 4.5 to 5%.
