How can private wealth be better harnessed for private equity? This is not a new question, but to hear the people involved tell it, there is a great deal of interest in it at the moment. The giants Blackstone and Blackrock, in particular, have embarked on a journey of tapping into private wealth.
By ‘private wealth’ we mean ‘high net worth clients,’ who generally have inherited wealth or are wealthy from the sale of their business. The financial services industry is putting a lot of effort and innovation into reaching this segment of investors. Many funds are being set up with this in mind. The main challenge is to explain the logic and specific mechanics of PE--a long-term, illiquid investment--to this type of investor. The selling point: performance. In very good years, in traditional PE, the internal rate of return (IRR) was between 15 and 20%.
Private markets can generate exceptional gains for high net worth individuals.
Valérie Tixier, private equity client & market leader at PWC Luxembourg, sees a growing demand: “Over the last decade, private clients and high net worth individuals have increasingly favoured alternative and private markets over traditional markets, due to a combination of market dynamics, investment objectives and the unique features offered by alternative investments.”
Private markets, she continues, are generally seen as capable of enhancing returns and delivering higher gains. “This was particularly crucial during the widespread inflation-driven market recession of 2022 and the official end of the era of near-zero interest rates. Whether through PE or other asset classes, private markets can generate exceptional gains for high net worth individuals, while helping to diversify their portfolios by offering exposure to asset classes that are not highly correlated with traditional markets.”
In a global context of relative decline in listed assets in favour of non-listed assets, PE is becoming a must for investors looking for a portfolio that is a little out of the ordinary. And as Tixier points out, Luxembourg has established a leading position in Europe in the alternative field: “The structures of specialised vehicles, such as the specialised investment fund (Sif), the restricted alternative investment fund (Raif) and the special limited partnership (SCSP), offer a great deal of flexibility in terms of investment strategies, risk management and investor protection.”
A club dedicated to wealth management
Proof of the interest in this subject, the Luxembourg Private Equity & Venture Capital Association (LPEA) has created a club dedicated to wealth management to bring together the players. Private clients are a relatively new target for PE funds, which are used to working with institutional and professional investors. “When we talk about high net worth clients, we first think of private bankers, wealth managers, insurers and their clients. But there are also new players who are creating their own structures--for example, funds of funds or feeder funds,” explains LPEA CEO .
Pesch insists that the targeting of private clients is not limited to high net worth individuals, but also includes the most affluent clients in the retail segment. “The aim of democratising PE is to make it possible to invest amounts of less than €100,000. We can take inspiration from what we see elsewhere. For example, Bpifrance launched a fund that even allows individuals to invest €3,000.”
He points out that certain channels are already open to individuals wishing to gain exposure to PE. “Luxembourg has a somewhat forgotten structure, the ‘part II’ fund, which allows greater freedom than Ucits in investment choices. With this and the new version of the Eltif regulation, we have a toolbox that gives more investors access to alternative investments.”
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While this strategic area is of great interest to asset managers, most of them are also aware that, in order to reach more people, they need to offer--at the cost of lower performance--greater liquidity. Alongside the closed-ended funds typical of PE, semi-open-ended and semi-liquid funds will grow in importance, predicts the CEO of the LPEA. “But to be able to provide monthly or quarterly entry and exit options, you need to be able to keep up in terms of calculating valuations. This will be a challenge for the service providers involved.”
To better capture retail investors, the LPEA is banking on education and training. “Not just for the end investor, but also for the intermediaries who distribute the funds,” explains Pesch. Since 2020, the association has been offering its own digital programmes, updated each year with specific modules. In conjunction with HEC Liège, it also awards a certificate in PE. Discussions are underway with other universities, including the University of Luxembourg, to set up a masters programme.
Value is created over time and through the expertise of the managers. So you have to give them time!
These programmes are no substitute for personal involvement on the part of the investor, adds the industry representative, who calls on those concerned “to be proactive and to inform themselves.” “The intermediary must have a thorough understanding of PE. It’s not an asset that you can buy in the morning and sell in the evening. Value is created over time and through the expertise of the managers. So you have to give them time!”
In the shadow of the big international names that are regularly in the spotlight, a myriad of more or less discreet players are helping Luxembourg’s private equity sector to flourish. Find out more on Thursday.
This article was originally published in .