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Attracting HNW Clients With Direct Investments

In an industry dominated by service, sometimes a powerful product can still be king.

“Show me the deals!”

That common refrain has echoed for decades from institutional investors looking for promising co-invests. As private equity becomes more democratized, retail investors are joining the chorus. Wealth management firms pushing to separate from the pack will need to present a suite of private investment opportunities to their ultra-high-net-worth (UHNW) clients in a way that enables advisors to provide differentiated advice and unique solutions in the context of their whole wealth offering. In an industry dominated by service, sometimes a powerful product is still king. 

Direct investments offer a notable opportunity for UHNW clients to take advantage of private equity-like returns, while avoiding the traditional fund fee structure and, at the same time, exercising more control over how their money makes money.  

Even with the unprecedented rise in public equities since the financial crisis, private equity returns across strategies have bested not just all the headline equity indexes, but all major asset classes generally. Coinvest opportunities have outperformed even their peer funds. More value is accruing privately longer, and firms can look to tap this vein by offering a cutting-edge direct investment platform to specific and well-qualified clientele.  

Firms will, however, need to ensure these deals are visible only to select clients. While Reg D limits the types of clients who can invest in certain private deals, firms may wish to apply even stricter net worth requirements due to the potentially sizable price tags and liquidity concerns associated with these investments. 

Determining how to qualify clients in this regard can prove difficult. Many UHNW clients will have holdings spread across various custodians, and wealth managers will have to analyze how held-away positions are valued and whether those valuations can be verified via aggregation software. Additionally, ownership of private companies, real estate and crypto assets may pose even greater valuation difficulties.  

Simple net worth attestations by the wealth manager come with their own risks as well, as there may be an incentive for well-meaning advisors to round up to qualify clients for consideration in certain deals. Supplemental controls need to be enacted to further confirm or reject such attestations.  

A tiering system for various levels of client deal qualifications will need to be integrated into any direct investment platform, and thought must be paid to compliance concerns around solicitation and Reg D adherence.  

Any direct investments platform must also provide wealth managers with the ability to apply screening criteria across the swath of investment opportunities. While this may not be a paramount concern to firms offering few deals, larger wirehouses offering potentially dozens of opportunities each year will need to provide various levels of filters to wealth managers looking to present appropriate deals.

Performance data will typically not be available for direct investments, and any projections should be viewed through a skeptical lens, but even private investments should have screenable attributes around ESG, management structure, institutional coinvest and other high-impact particulars.  

Questions need to be answered around how direct investments fall into wider firm allocation models and where large illiquid equity investments lie in rebalancing calculations. Capabilities of risk analytic and performance reporting software will also need to be reviewed to ensure those metrics are being correctly and accurately attributed in an easily digestible way.  

Finally, firms should consider what type of liquidity they are prepared to offer around such investments. Making a market in these private securities may prove too high a hurdle, but there may be an opening to match clients already integrated on the platform on a secondaries-style basis. Flexible lending solutions around direct investments can offer another way for wealth managers to deepen relationships, drive revenue and sharpen competitive advantage. 

When piecing together a roadmap to win the lion’s share of even larger wallets, wealth managers and their firms should find direct investments a powerful fit. And the next client to demand, “Show me the deals!” need only be met with, “Sure, right here.”    

Simon Zais is a consultant with Capco specializing in Wealth Management. He has experience in both the front and back office, using his broad experience to execute meaningful change across organizations. Simon holds a degree with honors from Baruch College and is a CAIA charter holder. He lives in Connecticut with his wife, son and two dogs.

Grant Clampitt is an associate consultant within Capco’s Wealth and Asset Management. A recent graduate of the University of Iowa, Grant holds a degree in Enterprise Leadership. He currently lives in Chicago where he was born and raised and is an avid golfer.

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