Private assets have historically been the preserve of institutional investors or individuals with significant wealth and sophistication. However, private assets are now entering a new era of broader accessibility, opening up possibilities of investing into them for mass-affluent and, potentially in the longer-term, retail clients that hasn’t previously been an option. Investment providers who position themselves for this next era will be well-positioned to take advantage of the benefits and opportunities that arise.
Reflecting the shift to democratisation
Across the wider investment industry, niche platforms are offering lower investment thresholds and enhanced short term liquidity. At the other end of the spectrum, large investment managers are scaling up their private assets capabilities and building distribution reach through acquisitions and recruitment.
Win / Win – potential for better returns for investors and benefits to the UK economy
Nearly two years ago the Productive Finance Working Group published a series of recommendations to facilitate greater investment in longer-term less-liquid assets. The Working Group, now disbanded and having achieved its objective, the industry- led Group was co-chaired by the Governor of the Bank of England, the Chief Executive of the Financial Conduct Authority (FCA) and the Economic Secretary to HM Treasury.
The Working Group set out the case for these assets;
- Firstly, the role they play for potentially delivering better returns for investors – particularly those who are saving for retirement in their Defined Contribution pension schemes, due to the longer time horizons.
- Secondly, how investment in longer-term assets can support economic recovery through investment in productive assets such as research and development, technology and infrastructure.
The call to action – then…and now
The recommendations of the report led the industry to act. One of the 13 recommendations was for the FCA to consult on changing the rules around investment in illiquid assets through unit-linked funds and reviewing distribution rules to facilitate wider distribution to appropriate retail clients.
The FCA concluded that work and in November 2021 launched the Long-Term Asset Fund (LTAF) regime1. Under the regime, LTAFs must be authorised, be at least 50 percent invested in illiquid assets, be valued at least once a month and have a minimum 90-day notice period for investor redemptions. To date, LTAFs have been available only to professional, sophisticated and high net-worth investors, but the FCA has now changed its rules to make these funds available to a broader subset of retail investors.
New rules for a new era
Fast forward to 29 June 2023 when the FCA published its policy statement, amending the rules for LTAF distribution. The final rules re-categorised an LTAF unit from a Non-Mass Market Investment (NMMI) to a Restricted Mass Market Investment (RMMI), allowing distribution to mass market retail investors under certain conditions.
Longer-term less liquid real assets can generate good alternative returns for investors and, crucially, help to grow the UK economy through investments, such as new infrastructure. Our new rules allow retail investors, and pension funds, to invest in productive finance, but they also recognise that long-term investments can be riskier. That is why people will be given clear risk warnings and customer assessments, in line with other higher risk products.
Since the launch of the regime in November 2021, a very small number funds have been authorised by the FCA, the first of which was announced as recently as March 2023. To date, uptake has been slow. However, the improved distribution possibilities may reverse this trend.
The FCA is now also consulting on the potential removal of LTAFs from coverage under the Financial Services Compensation Scheme (FSCS), given LTAFs’ potential to be complex products with higher investment risk.
The future for wealth managers
The interest and demand from individual investors to have access to private markets as part of their core portfolio is larger than ever. However, as wealth managers look to enhance their investment offering into private assets, there are three key challenges they face;
Wealth managers who want to expand their propositions to include less-liquid investments may require the most significant shift. This is because many of their processes and procedures are built on the central tenet that investments are liquid – traded and settled within very short time frames and with highly liquid markets. Private assets by their nature, are at the other end of the spectrum and hence require a different approach. The complex nature of alternative assets and difference in structure when compared to more traditional asset classes, mean that processes have not been embedded into the operating model. These manual, resource heavy and time intensive processes add additional cost and risk to the business and have often led to wealth managers finding it difficult to scale their private markets proposition.
Building a team of highly qualified specialists takes time and money. In addition, the significant amount of time that is then spent on administration and manual processes dramatically reduces the time that specialists have for deal making and add value to the balance sheet.
Private assets carry with them additional risk for wealth managers, specifically, requiring a robust governance framework in place to protect underlying investors who have access to such investments. The FCA continues to review the guidance on the appropriateness of such investments, who can be marketed to and how investment risk is discussed and communicated with the end-client.
With this backdrop, the return on investment can take longer and be more complex to realise. However, the increased demand from clients is pushing wealth managers to look at their operating model and use technology to bring operational efficiencies and reduce risk.
Why technology enablement is crucial for success
The adoption of new technologies within a wealth manager’s operating model, such as data analytics and process automation is increasingly seen as the key.
Technology based business-to-consumer distribution specialists giving semi-professional investors greater access to a wide range of private equity and debt assets. Even if some investment strategies and potential returns remain largely restricted to institutional investors, it offers portfolio diversification through pooled vehicles allowing retail-like investors access that was not possible before.
There are a growing number of Fintechs and specialist vendors helping firms to realise efficiencies and overcome challenges in the investment operational life-cycle through automation and outsourcing. Examples of point-solutions include client onboarding, smart contract/unstructured data ingestion and waterfall calculation.
Tokenisation of fund structures is expected to transform the landscape: fractional ownership of funds (rather than the underlying asset) should allow even greater distribution opportunities for wealth managers but recognising that internal operating models will still need to be able to manage both “on the block-chain” as well as “off the block-chain” operating models whilst the industry matures in its ability to manage end-to-end value streams in a tokenised world.
Operating model re-design is the lynchpin
These new operating models bring together the benefits of the regulatory changes as well as technology enablers. For wealth managers this means re-assessing their entire life cycle of their funds including consideration for:
- Marketing and distribution capabilities
- Handling liquidity requirements and capital calls
- Investment performance reporting requirements
By assessing the entire life cycle in its current state and determining how the regulatory and market changes can be reflected as well as understanding where technology can be used, firms can accelerate their pivot to a “digitalised” eco-system that can successfully manage and run private assets for wealth clients.
What does this mean for clients and how can KPMG help?
KPMG can help wealth managers consider their strategic and tactical approach to successfully embedding private assets investment opportunities into their overall operating model; including for example, support with
- Developing distribution strategies and client journeys towards different client segments
- Designing investment propositions reflecting private assets
- Re-designing business operating models to accommodate broader distribution / new investment propositions
- Supporting clients’ in managing the complexity and challenges of responding to new regulatory regimes and risk frameworks
- Helping clients in defining and implementing new technologies to deliver greater efficiencies, product development risk management and distribution.
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