The place occupied by private assets at the heart of the investment strategies adopted by wealthy families has grown considerably in recent years. Private clients have developed a real appetite for unlisted assets, focusing on private equity, private debt and infrastructure. This craze can be explained by a number of trends that have been underway for several years. Firstly, private markets have grown significantly since 2008. Private debt, for example, has seen a sharp acceleration due to banks being more selective in their choice of corporate financing.
Private equity, on the other hand, has developed strongly, offering a growing number of investment opportunities. “There has been a sharp decline in the number of companies listed on the stock market. Currently, more than 80% of companies with revenues in excess of €250m are not listed,” explains Jérôme Zahnen, head of private equity at Banque de Luxembourg. “For investors, these companies represent a significant market, which continues to grow.”
Private equity is positioning itself as a genuine complementary alternative to traditional equities. All the more so as the markets are witnessing an ever-increasing concentration of value in a limited number of players. “In the United States, around 30% of the capitalisation of the S&P 500, the index that groups together the 500 largest US capitalisations, is captured by the seven largest valuations,” continues Zahnen.
Diversification and returns
Faced with these trends, investors have seen private markets as a lever for diversification, but also as an opportunity to improve the returns on their portfolios. “Investing in private equity implies a firm commitment over the long term. It is therefore associated with an illiquidity premium that supports returns. We can also add a higher risk premium, which varies according to the segments in which we invest,” adds Zahnen. Institutional players, insurance companies and large pension funds first led the way. Private investors have gradually followed suit, developing a growing interest in these alternative assets with the desire to benefit from a better risk/return ratio.
Restricted access
One of the challenges facing private bankers and wealth managers has been to devise new approaches to enable their clients to access these investment opportunities. The entry ticket to invest directly in a private equity fund remains high. Exposure to this asset class requires financial resources of several million euros.
In order to meet the wishes of wealthy families, Luxembourg’s wealth management players have for some years been developing solutions that help to democratise this asset class. In particular, this is reflected in the introduction of pooled vehicles. “With a fund of funds, such as the one we set up ten years ago, we can raise capital from several private clients. This approach enables us to achieve the critical mass needed to access flagship private equity funds,” explains Zahnen. Luxembourg regulations set the threshold for access to alternative investment, based on the principal residence, at €100,000. Whilst we can talk about democratisation, these solutions are still reserved for a wealthy, well-informed clientele.
Making the right choices
“From this vehicle, it is then a matter of making a selection from the available offer, continues the head of private equity at Banque de Luxembourg. “There are now thousands of funds, run by a wide variety of managers, with wide disparities in terms of performance. To invest properly, you need to have the necessary skills to carry out accurate analyses.”
Faced with these opportunities, it is also essential to provide sound advice to this clientele attracted by this asset class. In particular, it is vital to ensure that investors have a good understanding of how these products work, so that they can determine how to build their portfolios over the long term. “To do this, you need to consider your risk profile, asset size and liquidity requirements,” adds Zahnen. “Private assets are above all a lever for diversification, and their allocation should represent no more than 30% of the investment portfolio. The target allocation should be between 10% and 20%.”
Increase in fundraising
While private clients are increasingly interested in alternative investment, In recent years, fund managers have stepped up their efforts to raise capital from wealthy families. Given market trends, fundraising requirements are tending to increase.
Institutional investors, who have been active in this segment for several years, have more often than not achieved their target diversification objective. Private clients, whose overall assets continue to grow, are therefore increasingly called upon to meet the needs of the market.
The European Union also wants to make it easier to mobilise private capital to finance the needs of the real economy. It is in this context that it has set up the European long-term investment fund (Eltif), the new version of which has been in force since January 2024. Whilst this vehicle is aimed at sophisticated investors, it should help to democratise access to investment in private assets by relaxing the rules.
The emergence of open-ended funds
Investments in private assets, unlisted companies and property are generally made through closed-ended funds. These funds raise a fixed amount of capital during their fundraising period, then close to new investors, to operate for a fixed period, often ten years. During this time, capital is deployed in long-term investments, and returns are distributed to investors as assets are disposed of, usually towards the end of the fund’s life.
Alongside these vehicles, other funds, called “evergreen funds,” seem to be emerging in the private equity field. These are open investment vehicles with no predetermined end date. With lower minimum initial commitments and the possibility of subscribing to the fund on a periodic basis, they are more accessible to a wider group of investors. Investors benefit from greater flexibility, with easier entry and exit. The investment targets of these funds are more diversified. With long-term growth that can lead to higher profits over time. Whilst the flexibility of evergreen funds is attractive, they do have their limits.
It is important to consider the nature of the underlying assets. A building is, after all, an illiquid asset. The investment made at company level is not easily recoverable. For managers, the use of evergreen funds means considering the right balance between flexibility and illiquidity, in order to set clear rules for investors.
This article was written in for the to the of Paperjam magazine, published on 26 March. The content is produced exclusively for the magazine. It is published on the site to contribute to the full Paperjam archive. .
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