Private markets are increasingly important to investors who want to access opportunities outside of the traditional indices or funds.
Advisers who are reluctant to consider these markets because they expect compliance and regulation to be too burdensome should think again.
Regulatory governance around private markets remains a complex topic. It is a critical factor why many advisers may lack the confidence to offer these investment opportunities to their clients and why there is a general tendency to keep this sector exclusively for those who are ultra-high net worth (UHNW) or sophisticated in the space.
Yet, the increased use of technology to manage compliance issues across private markets investments has changed this environment. Unlike before, advisers no longer have to grapple with pages of client notes to determine which clients these particular types of investments are appropriate for. Instead, digital tools can help businesses to robustly manage the most crucial regulatory requirements and generate valuable client insights.
Client demand brings private markets into the mainstream
While there is a relatively small pool of UHNW clients worldwide, there is a growing number of clients who could be a receptive audience for private markets investments.
While accredited investors already qualify for privately listed opportunities, the past decade has seen a significant number of other investors take proactive steps to diversify their portfolio through alternative investments. This trend is commonly referred to as the democratisation of private markets.
Digitising processes such as deal distribution, client profiling and operational workflows will undoubtedly increase advisers’ efficiency. But, more importantly, it will help them to scale their private markets offering at a time when client demand for access to these opportunities is accelerating at an unprecedented rate.
In short, digitising access to private markets not only helps to limit regulatory risks and improve operational efficiency, it also provides a unique opportunity for advisers to build a compelling client offering that increases client engagement and generates additional revenue streams.
Traditional private markets compliance is complex, but it does not need to be a blocker
Traditionally, advisers and wealth managers have pointed to resource-heavy compliance procedures as the main reason for limiting client access to private markets. A reliance on paper-based, manual processes that are overseen by teams of people has meant that meeting regulatory demands became a significant cost to most advice businesses.
In this environment, it is little wonder that the pool of investors that has typically been offered access to private markets has been relatively limited. In fact, 82 per cent of wealth managers said they see regulatory compliance as a barrier to providing their clients access to private market solutions.
However, wealth managers rapidly realise that they can no longer ignore their clients’ demand for private investment opportunities. Instead, the most forward-looking businesses aim to turn compliance into a commercial advantage by using technology to generate real-time analytics that create valuable client insights.
Through automation, businesses are streamlining their operations and strengthening their regulatory processes while freeing up time for staff to add greater value to their clients and undertake more fee-generating activity.
Technology will drive the future of regulatory compliance
The use of technology to manage compliance in private markets has accelerated in the past five years or so. Still, digital adoption across the wealth management space remains inconsistent at best. The events of the past 18 to 24 months have been as significant a catalyst for digitisation as anything that the industry has seen. Digital tools are becoming a key part of the compliance armoury for any adviser, wealth or investment manager serious about dealing with opportunities in private markets.
Although digitising regulatory controls will only ever be as adequate as the governance frameworks that underpin them, the use of technology to support compliance processes does make wealth managers feel more confident in offering access to alternative investments, including private markets.
This is borne out by the fact that nine out of 10 wealth managers using digital compliance tools say that their private markets offering is governed as well as or better than their traditional investment proposition. This number drops to just six out of 10 for businesses that are not using technology*.
Legal, regulatory and reputational risk can be managed better
Any wealth manager or adviser looking to offer access to private markets must minimise any legal, regulatory or reputational risk to their business.
Technology can mitigate many of these issues and is a relatively low-cost option compared to traditional, paper-based compliance controls that require high levels of human involvement. Instead, these resources can then be redeployed to other fee-earning activities to help maximise the overall return on any investment associated with digital tools.
Yet, there is a more significant benefit to companies adopting technology to deal with their compliance activity than simply ‘cost cutting’.
The digitisation of governance processes will also generate previously hidden data insights that can be used commercially to offset compliance costs. This could be identifying trends in which types of investment opportunities have the most appeal to their clients or simply targeting deals to clients more proactively based on regulatory profiles.
Accessing data can help compliance create a business advantage
The ability to access data at the touch of a button can help wealth advisers and investment managers who are keen to expand their private markets offering to more of their clients. This will give them the chance to provide a genuinely holistic wealth management service that adds value to their client relationships and helps them retain and grow their assets under management.
Perhaps more importantly, it is also giving more investors access to the possibility of the greater returns that we have seen private markets achieve over the past 20 years, compared to more traditional markets. This has the potential to create a win-win for both clients and advisers.
All companies can benefit from a tech-led approach to private markets
The outdated method of manually collating private markets deals for clients is a severely limiting factor for wealth managers working in this sector, no matter how big, small, new or old they are. But adopting technology to improve these practices provides a relatively low-cost solution to a long-standing problem.
The ability to determine how, when and to whom these opportunities are offered is the future of alternative investment propositions. Those advisers or investment managers who fail to take this onboard risk losing clients to competitors who proactively tap into private markets and meet the rapidly accelerating investor demand.
*All figures highlighted in this article have been taken from Delio's research report Regulatory Governance in Private Markets.
Gareth Lewis is co-founder and chief executive of Delio
