Private bankers are at a loss trying to differentiate themselves from the ever-growing herd of wealth and asset managers and financial advisors. Every nook and cranny in fixed income or equities has long been colonised. Structured investments abound: on offer with most wealth managers are myriads of hedge funds and real estate investment trusts, sometimes disguised as a mutual fund or debt certificate.
With the aura it has gained through the recent market cycles of zero interest rates and manic-depressive stock exchanges, private equity too entices wealth managers and their clients. Here may be something the competition does not have on offer. If your wealth manager or private banker has not approached you yet: do not despair; the time is near.
Of course, investing in private equity has been possible with most private banks for some years but it was generally restricted to the highest bracket of clients. Either the bank managed a private equity fund itself or it fed its clients’ money to one of the larger private equity players. The fee was good; the risk profiling only so-so. On more than one occasion investors suffered a nasty surprise when some of private equity’s peculiar risks were realised – lack of liquidity to name just one.
To counter the cowboys, the European Union has issued the Alternative Investment Fund Managers Directive (AIFMD). I really do not want to delve into the arcane depths of the directive. Suffice to say the regulation – together with the Markets in Financial Instruments Directive (MiFID) – imposed on private equity fund managers are so onerous that most of the small to medium-sized managers will think twice before launching new funds.
Going forward, private banks may continue to offer private equity to their esteemed clients, but the menu will be reduced to acting as a feeder into the household names like the Blackstone or Carlyle Group, CVC or KKR. A void is opening up below those big shots as the medium-sized funds shut down.
Increasingly however, the market for private investments expands downwards, towards smaller but direct participations in companies. The fact that most of these investments concern local companies may be more of an advantage than a drawback. Investors, who typically made their fortune as an entrepreneur, relish the often personal contact with the portfolio company’s owners or management. There is a level of commitment and engagement here that is impossible to attain in the indirect investments with private equity’s moguls. The investor feels more empowered, rather than an outlet for yet another abstract product or strategy his banker wants to flog. It is his or herinvestment portfolio again.
And the financial advisor’s role becomes that of a coach again, safeguarding the portfolio’s risk exposures and facilitating the long-term dialogue between capital providers and company management.