By: Paymun Saket
Managing Director - LP Products
January 10, 2022
In seeking out returns for their ultra-high-net–worth clients, wealth managers, like many institutions, continue to be drawn to the private markets and alternative investments. According to a survey from bfinance, 61% of wealth managers have increased their allocations to private market strategies in the last three years.
Some wealth managers are now seeking to leverage that experience and familiarity with the private markets by stepping beyond their limited partner positions and into a fund manager role, offering investment products to a wider base of investors beyond their wealth clients.
For many wealth managers, opening a fund of funds presents an exciting opportunity to capitalize on those skills while deepening relationships with their core clients and increasing their firms’ capabilities and return potential. They have deep experience in researching, vetting, and selecting private equity and private debt investments. They’re also accustomed to selecting the right bucket of these investments depending on a given wealth client’s needs (risk, geography, ESG, and other exposure categories) and then monitoring those investments through a years-long lifecycle, making them particularly skilled players in a complex space.
However, while they may have the investment selection and servicing elements down, managing investors is likely a whole new ballgame for wealth managers entering this space. As some choose to test these waters, what existing strengths can they lean on, what pitfalls should they watch out for, and what tools can help their expansion to fund of fund managers?
DOWNLOAD: Infographic: Fund of Funds & Alternative Investments – 3 Current Challenges
Why are wealth managers making the jump to fund of funds manager?
By capitalizing on their experience in managing multiple stakes in different private investment funds, wealth managers stand to benefit both themselves and their current wealth clients on a few different fronts.
- More capital and the potential for better returns – Access to more capital is generally seen as leading to greater success when investing in alternatives because it opens the fund of funds manager up to better investment opportunities (discussed in our next point), better terms, and lower fees. Seeing greater returns on a larger scale is good news for their core wealth clients, as well as their own business, as they can bring in additional management fees and potentially carried interest depending on fund performance.
- New and better investment opportunities – Bringing in capital from additional investors looking for a stake in a fund of funds, fund of funds managers will likely gain access to new investment opportunities (potentially even co-investments) they were boxed out of before, establish relationships with larger managers, and achieve greater diversification.
- Timing and high demand – Institutions are entering the private market – many for the first time – and scaling their allocations at impressive rates. According to a survey by Schroders Capital, 90% of wealth managers plan to increase their allocations to private assets in the next 12 months, and 80% highlight diversification as a main driver for investment in the private market.
- Diversification – Building one’s own diversified private investment portfolio takes several years and plenty of dedicated, experienced staff. Meanwhile, fund of funds allow those institutional investors to plug into an investment vehicle that offers instant diversification – by fund size, fund type, geography, risk level, and beyond – and instant access to the market. Fund of fund structures can also offer these institutions custom exposures and the opportunity for separately managed funds.
What challenges will wealth managers encounter when opening a fund of funds?
There are many reasons why running a fund of funds is an excellent option for a wealth manager schooled in the private market space. But foraying into a new strategy or offering is never simple, and there are plenty of new requirements that wealth managers will have to prepare themselves for if they decide to open a fund of funds. These new challenges come down to two key points.
Firstly, managing investors is a whole new ball game. If a wealth manager expands beyond managing only high-net-worth individuals’ money and into running a fund, they will encounter the many responsibilities that come with managing investors – marketing to a new kind of prospective client, participating in due diligence reviews, complying with different regulations, reporting to investors, and likely fielding an influx in one-off reporting requests.
Secondly, as wealth managers take on managing alternatives and private assets, they need software specifically developed to help them do that. From start to finish, managing private assets is different than managing public assets – from benchmarking to tax policies to valuation. Private investments also bring increased data needs, as a fund of funds manager needs to manage investor data, capital commitment data, opportunity data, investment data, and accounting data across the whole lifecycle and maintain access to it in one unified system. Some wealth managers are likely familiar with these differences already, but as they launch their own fund of funds, the need for the right technology becomes even more apparent.
Wealth managers taking this route will have to ensure that the technology platforms they rely on for front- and back-office management will extend into the investor management sphere. And for wealth managers who currently rely solely on Excel for their investment operations, they will most certainly have to plan for adoption of a robust technology suite that enables them to reduce risk of human error and empower data sharing and analysis.
DOWNLOAD: Benchmarking Private Asset Portfolios: Technology is Critical as Investors Venture into New Markets
How can technology help wealth managers launch a fund of funds?
Fund of funds managers have the unique challenge of wearing both investor and fund manager hats. They require tools that help them understand their risk and performance across multiple different managers while staying on top of the capital calls, statements, and other investor communication documents from each. But they also must have technology to help them take on the challenges of managing investors, and many providers can’t answer to both ends.
To set themselves up for the best possible success as they foray into a new offering, wealth managers should find an interconnected solution that supports all alternative asset classes and all investment lifecycle data while letting them manage their many stakes in different funds and the responsibilities of investor relations. And particularly when starting up a new fund, managers will want to ensure their teams are focused on value-add activities and creating returns rather than wrestling with data management issues.
How Allvue’s Limited Partner Portfolio Management solution empowers wealth managers’ foray into fund of funds
Allvue’s fully integrated Limited Partner Portfolio Management system provides wealth managers with insight into their portfolio and a back-to-front solution that they require as an investor, while also offering the ability to link up with other products that support investor relations efforts should they choose to open their own funds.
Expanding to a new strategy in a fast-moving environment can offer plenty of payoffs but also leaves many unknowns. See how Allvue empowers wealth managers to handle the challenges of managing complex alternative assets while allowing them to deepen client relationships and expand return potential.
