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Written by: Elliot Refson | Jersey Finance
The norms of the global alternative and private investment sector are being challenged like never before – on multiple fronts. Reflecting on a white paper recently published by IFI Global in partnership with Jersey Finance, Elliot Refson, Head of Funds at Jersey Finance, explores how a number of largely unrelated factors are coming together to present private and family office investors with new opportunities…
With asset raising no longer as straightforward as it was and technology evolving at pace, investor diversification, product diversification and structural diversification are set to truly transform the private investment sector over the coming years.
After 15 years of strong growth, many asset managers in the alternative and private investment sector are currently facing more challenging conditions than they are accustomed to. Many institutional investors, such as pension funds, have reached their target allocation thresholds for the sector, whilst the end of the once booming IPO market is also contributing to the challenging picture.
This environment has prompted many managers to diversify away from their traditional institutional investor base and look to family offices and the broader high-net worth market, who remain significantly under-allocated to the sector. Research from JP Morgan & Bain at the end of 2022, for example, found that just 5% of the high-net worth investor market had allocations to alternatives – but that 53% plan to raise their allocations to this sector over the next three years.
There are challenges to this. Accessing alternatives can be opaque, cumbersome and costly, there is a reliance on advisors and relationships to source deals, there can be minimum investment levels, and liquidity problems.
However, other significant changes in the sector are addressing these issues.
Opportunities
The adoption of new structures is one way that managers are looking to cast their net wider. Private market managers have been involved in investment structure diversification for some time, but this trend now looks to be accelerating.
Managed accounts, for instance, have become an increasingly popular mechanism for managers of private capital who are looking to open up their funds to a wider audience of investors. With fees relating to managed accounts having come down considerably in recent years, as they have been adapted for the advisor market, it is estimated that up to three-quarters of financial advisors in the US could be using managed accounts in the coming years, according to research from Investment Trends and SPDR.
In tandem, the rise of blockchain technology and tokenization is further transforming the market. Blockchain is increasingly providing a way into alternatives and private markets for high-net worth investors. Real assets backed by blockchain technology can be securely traded, tracked and owned, and can greatly aid liquidity and transparency, as well as very substantially reducing minimum investment levels.
In addition, the application of the concept of tokenization is set to revolutionize access to alternatives, helping to break down existing barriers for private and family office investors – giving them improved liquidity, transparency and control over their allocations, but without the extra fees. This is particularly significant in high-value investments such as real estate, private equity and infrastructure.
Tokenization might also become an option for retail investors who wish to gain exposure to at least some of the private market categories in the next few years.
It’s forecast that total tokenized market capitalization could reach around $2 trillion by 2030 (McKinsey, 2024). In particular, high-net worth investors are anticipating allocating an average of 8.6% of their portfolios to tokenized assets by the end of 2026, with high-net worth investors planning to allocate a greater portion of their portfolios to tokenized assets than institutional investors (EY Parthenon, 2023).
There are still hurdles to overcome - regulatory uncertainty in particular is a primary perceived obstacle, with 24% of high-net worth investors identifying it as a significant challenge. Nonetheless, tokenization’s impact upon private markets and the avenues it could open up for private investors could be transformative.
The major changes currently shaping the private markets suggest that, over the coming years, family offices and the broader high-net worth market should have a wider choice of strategies and structures available to them than ever before. Overall, at the mid-point of this decade, the outlook for private markets, overall, has never looked more promising – and investors and their advisors should be alive to those opportunities.
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