While investors have become more educated about alternative investments and more comfortable with the associated risks, a large information asymmetry between clients and asset managers remains, providing private banks with business opportunities to offer clients access and solutions.
Over the last few years, multiple private banks have seen a surge in client demand for alternative investments ranging from private equities, private debts and real estate assets. More recently, a family office report has shown that family offices too share this trend, with over 20% of total FO assets allocated to private equity and hedge funds, and Chinese family offices allocating more funds in private equity than publicly-listed stocks.
“The current macroeconomic and credit cycle, characterised by low yields and rising stock valuations, provides a favourable climate for alternative investments to grow as investors are trying to capture the illiquidity premium that exists in private markets,” Grégoire de Rham, head of alternative investments Asia at Bank Pictet & Cie (Asia) Ltd told Asian Private Banker. “We observe that some of the value creation takes place in private markets, as business owners are delaying the pressure of quarterly earnings for longer term planning.”
In particular, he foresees the demand for private real estate to lead among alternative investments, as the nature of private real estate assets synergises well in such an environment by providing inflation protection, diversification benefits, allowing for active ownership, aligned incentives and long-term investment horizons. In Asia, he observes a large increase in exposure in private assets, with allocation to hedge funds remaining “relatively constant”.
Challenging selection process
Another push factor for the demand for alternative assets is an increasing sophistication of investors. “Alternative assets are typically more complex than traditional asset classes, but as investors become more educated, they become more comfortable with the alternatives value proposition,” he said.
Although clients are more willing to increase allocation to alternative investments, a large information asymmetry remains between clients and investment managers. Also, high entry barriers make accessing private markets challenging.
The limited access to alternative investments has resulted in record figures of alternative fundraising across private banks, which can offer smaller-scale investment options and professional advice to HNW clients.
“Pictet has observed a bifurcation trend within private markets: on the one hand, there are large, pan-geographical mega-funds; on the other, there are highly specialised/localised players. This results in unique challenges within the different segments of alternative markets,” said de Rham. He pointed out that the bifurcation leads to difficulties in sourcing quality investment opportunities because best performance, large scale funds are often heavily over-subscribed with capacity constraints, while niche firms require profound local networks and/or deep industry expertise in order to cover the market effectively.
“The gap between average and top-tier managers is significant, which makes the selection process even more challenging. At Pictet, the team has adopted a long-term approach, in that the investment professionals meet regularly with the managers,” he said. “In certain cases, monitoring can take up to several years before an investment decision is made.”
In its 30 years of on-the-ground alternative investments experience in Europe and Asia, Pictet has evolved from a purely alternative asset manager selection activity into a platform with extensive expertise, including co-investments and direct investments capabilities.
“While our business model focuses on UHNW clients (to whom we offer highly customised, high-touch alternative portfolios), clients with smaller appetites are able to participate through our flagship alternatives products in hedge funds, private equity and private real estate. Such products are commingled solutions that benefit from the same in-depth research activity,” De Rham explained.
He pointed out that the firm created a direct European real estate franchise late last year, capitalising on Pictet WM’s presence in many European locations. “Having a more “boutique mindset” allows us to listen to what our clients want, yet, with over US$26 billion in alternative investments, we are large enough with resources to implement these strategies effectively.”
Tee Fong Seng, CEO of Pictet Wealth Management Asia told Asian Private Banker late last year that he sees stronger demand for alternative investments in the region, particularly for private equity and real estate, as one of the largest opportunities for the bank in 2020.