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Why Most RIAs Can’t Handle Private Equity

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Not long ago, nearly all the money that flowed into private equity funds came from large institutional investors like hedge funds, university endowments or pensions. That’s no longer the case. 


Indeed, in recent years, demand among wealthy individuals for such investments has skyrocketed. Alternative asset giants such as Blackstone, Apollo, Carlyle and KKR have attracted billions after introducing funds aimed at this market. And all have ambitious plans to unveil more in the years ahead.


The trend is partly due to an enduring truth about American markets: Investor capital will go almost anywhere to chase returns, and companies will always try to evolve to accommodate them. But more than that, it is also about the market evolving with the current investment landscape.


With central banks worldwide in the process of winding down more than a decade’s worth of easy money policies, the traditional 60/40 portfolio construction approach may not serve investors well in the future. That, in theory, leaves room for private equity to be a part of the solution, whether it’s investors pursuing more yield or wanting access to vehicles that are uncorrelated to bonds and equities. 


Whatever is driving the increased appetite among individuals for private equity, the trend highlights the importance of firms and advisors having access to a wealth management platform that can make sense of it—both on a standalone basis and as part of a client’s holistic financial plan.


Tech Can’t Treat Every Asset Class Equally 

Private equity funds are illiquid, just like most alternative investments, with holding periods lasting several years. While this dynamic can produce higher returns, it also means that investors must be able and willing to tie up a significant amount of capital for an extended period.


Then, once private equity funds start paying distributions, it’s a tiered process. Payouts, in some cases, can get spread out over several years (and that’s if the fund is successful). So, from a liquidity perspective, such funds aren’t just different from stocks and bonds; they also differ from other alternatives.


These nuances have enormous implications for charting a client’s existing and future cash flows. Most wealth management platforms can integrate private equity investments on a fundamental level, able to capture performance and how much a client has invested, just as they would other holdings. 


But very few offerings appreciate the distribution puzzle described above and how it would impact a client’s planning. That shortcoming can make an already complex process that much more daunting. 


But Tech Can’t Treat Every Asset Class Separately Either

At a basic level, constructing portfolios is an ongoing conversation between an advisor and a client surrounding one question: What are you willing to risk to reach all your goals? This is why even as each asset needs different treatment, getting a comprehensive view of the entirety of their wealth is so important.

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