Industry must tame the private markets’ Wild West

Industry must tame the private markets’ Wild West

Private markets is an area many advisers have traditionally shied away from, yet continuing to ignore this growing sector could not just be detrimental to their business but also to their clients’ investment portfolios.

The last decade has seen increasing demand for private markets investments.

This is partly because they have outperformed the FTSE 100, 250, 350 and All-Share indices over the past five and 10 years, but also because of the greater interest in areas such as climate change.

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Data from the British Venture Capital Association showed that investment growth in UK private equity and venture capital has averaged 20.1 per cent over five years and 14.2 per cent over 10 years, based on vintage year returns since inception to December 2019.

This is compared with 7.5 per cent and 8.1 per cent respectively in the FTSE All-Share. 

Historically, private markets had a reputation of being something of a ‘Wild West’ sector, which meant advisers and wealth managers were reluctant to help their clients access these markets.

However, they have become more appealing.

The barrier for many advisers and wealth managers is their fear of the perceived regulatory and operational complexities involved – and this is not without foundation.

Many companies in this area are still relying on a traditional operating model and paper-based records, which are more difficult to audit than electronically held data.

Poor governance of deal distribution and inadequate data and document management all contribute to them struggling to meet the regulatory demands associated with private investments.

These are not inconsiderable hurdles to overcome. In fact, in our report ‘Private markets in wealth management’, 65 per cent of companies said the challenge of consistently achieving full regulatory compliance was the main obstacle to them launching their private market proposition.

They are usually keen to add to their portfolio of businesses with investments in start-ups or sector-driven businesses that are close to their personal interests, and they do expect to be able to access data as and when they want.

This is where the adoption of technology for advisory processes becomes essential in private markets. It ensures advisers are complying with all relevant regulations and it enhances the client experience.

Traditionally, wealth managers, high-net-worth advisers and family offices have shunned the adoption of technology because they have felt that, somehow, it would make them less valuable to the client.

But that argument is becoming flimsier by the day. Technology is an essential part of everyday life and without it, the ‘Wild West’ opinion of private markets will not be expunged.

Earlier this year, the Financial Conduct Authority highlighted alternative investments as a key area that it will be focusing its attention on in 2020-21. 

As a result, the regulator is likely to be keeping a close eye on how companies are offering alternative investments to their clients in 2021 and beyond.  

So, it is down to us as an industry to not only help clients to access the investments they want, but to ensure that when they do so, they are operating in a properly regulated, fully-compliant environment.