LP interview: Escala Partners

Australia’s qualification criteria for wholesale investors – those who meet it can have direct exposure to financial products like private equity funds – were based on data from 1991. Since then, per capita GDP has grown more than threefold and median property prices have risen by over 400%.

The notion that having AUD 2.5m (USD 1.6m) in net assets or AUD 250,000 in gross income for two consecutive financial years constitutes a mark of sophistication is increasingly regarded as anachronistic. Its viability has been questioned in government reviews and the Financial Services Commission suggested in a 2021 white paper that the net assets requirement be doubled.

For now, though, that is the theoretical threshold for tapping the nation’s growing pool of high net worth individuals (HNWIs) and offering them access to investments deemed too complex for the mainstream that may deliver additional alpha. Escala Partners, a wealth management platform that serves a diverse array of HNWIs and family offices, prefers to take a more considered approach to client screening.

“We don’t rely solely on the concept of a wholesale investor. There is another band, the professional investor [someone with assets of at least AUD 10m] that’s similar to the accredited investor in the US. We would look at that,” said Chris Selby, a vice chairman at Escala.

“Some of the more traditional brokers or private banks just focus on wholesale, where they market certain kinds of products to investors. We need to be more discerning. A family with no investment experience or a highly sophisticated family office might both qualify based on net worth. We must assess the competency of the person making the decisions and the owner of the capital.”

Being relevant

The distinction between private bank and wealth management platforms is key to Escala’s market positioning. The firm looks to go beyond pitching private equity fund feeder vehicles to investors; it makes asset allocation recommendations based on a client’s existing exposure and risk appetite. The question then becomes does private equity belong in this portfolio and, if so, what kind?

Escala is one of a cluster of independent platforms that emerged when several global banks exited parts of their Australian wealth management businesses in the 2010s. The five original partners came from the likes of UBS and Deutsche Bank. Selby – who joined a few years later via Deutsche and Merrill Lynch – suggests the global banks were more suited to handling HNWIs than Australia’s family offices.

As these platforms have grown in scale, they have become conspicuous members of the Australian LP community. Working with family offices that often prioritise long-term wealth preservation over near-term wealth accumulation implies an innate comfort – relatively speaking – with the larger cheques and longer lock-ups that characterise private markets.

Their newfound prominence reflects the greater emphasis private equity firms globally are placing on HNWI and family office fundraising channels. An element of local nuance can be thrown into the mix as well, notably the fundamental appeal of Australia’s robust pension ecosystem, including superannuation funds and self-managed super funds, and a notorious preoccupation with fees.

“Every wealth platform in Australia has plenty of managers looking for engagement. The market is perceived as stable, and the fees are more attractive from wealth clients than industry funds,” said Selby. “We normally pay the full 2/20. Occasionally we’ll get friends and family rates, but we explain to clients that they can’t expect to pay the same price as institutional players. Most accept this.”

He maintains there are likely greater similarities between AustralianSuper and Aware Super – the two largest domestic superfunds with AUD 245bn and AUD 154bn in assets under management (AUM), respectively – than between any pair of family offices.

As a rule of thumb, AUD 10m in assets tends to be the point at which clients can achieve the appropriate level of portfolio diversity to justify using a platform like Escala. However, it’s a grey area. Exceptions are always being made for the likes of children from wealthy families who are expected to accumulate assets over a long period and sophisticated investors who have backgrounds in financial services.

This variety in client type means little can be read into the number of accounts on Escala’s roster. Selby estimates that more than 500 were onboarded last year representing wealth pools ranging from AUD 2m to over AUD 100m. Some clients have multiple accounts. The firm’s overall AUM is approaching AUD 10bn – and there’s no urge to move past this figure.

“We like to have the ability to be nimble. For example, we often participate in sidecars. These are popular with family offices – they go into a fund, and they like to see what’s available alongside the fund. If a deal is too large for the fund, the manager might offer a piece. Sometimes we may not put that on our platform, and we may or may not charge a fee. It’s very deal specific,” said Selby.

Advice becomes action

Assessments of Escala’s AUM are also complicated by a reporting infrastructure that captures assets that fall outside its area of responsibility. Some clients have no internal resources and rely on Escala to manage their entire investment portfolio; others maintain sizeable teams and use the firm as a point of execution and a source of information. Everyone receives monthly summaries of their overall holdings.

“We can make them aware that they are concentrated in a particular strategy or geography, and we can present it back to the family or other stakeholders,” said Selby. He recalled a meeting with a client who was concerned that his Escala portfolio was overweight equities. However, when viewed in the context of their overall holdings dominated by cash and property, the equities allocation was relatively small.

“Those conversations are great to have – it means the client trusts you. At the same time, without all that information, it is very difficult to make a proper AA recommendation,” Selby adds.

Borrowing from a model judged to have worked well in Europe, the firm runs education programmes for clients as well. These are largely focused on the younger generation of family members or the beneficiaries of the owners of the wealth. The onus is on getting them upskilled and helping them to understand the responsibilities that come with large pools of capital.

In 2019, six years after its founding, Escala became part of Focus Financial Partners, a New York-headquartered global group of wealth management firms recently acquired by Clayton, Dubilier & Rice. This brings scale and bargaining power with managers, but the firm retains much of its autonomy.

Selby notes that one of the pain points during the transition from working under a global bank to operating as an independent shop – the partners brought some relationships with them - was adherence to a list of centrally approved managers. This list had narrowed over time with the advent of tighter regulation and advisors were discouraged, or even barred, from recommending products not on it.

No longer beholden to a corporate parent, Escala’s approved list of managers in the alternatives space stretches from basic cash enhancement strategies to large buyout funds to semi-liquid products global firms are pitching to HNWIs. It is North America-centric because that market has the deepest ecosystem of managers. “European competencies are there as well, but Asia is harder,” Selby added.

The process of adding a US mid-market buyout firm to the list might begin with Escala’s CIO team identifying likely candidates, conducting deeper reviews, and then reaching out for direct interaction. It is not unusual for clients to take a year or more to reach a point where they are comfortable committing. Alternatively, existing clients may recommend managers that want to back or have already backed.

“We don’t always have every investable dollar of every client, so they see other opportunities. A lot of managers we’ve approved recently were introduced by families. They become harder to ignore because clients already have exposure to them, so we review them and may put them on the list,” said Selby.

“Some private equity firms, especially the large global platforms, are very good at making it easy for you to review them. Others are not, perhaps because they aren’t as interested in wealth platforms. Most managers are at least willing to do a call to understand what we represent.”

That willingness to engage with a wealth platform isn’t necessarily dictated by a manager’s size, but it helps when there is some infrastructure that can accommodate a relatively large volume of smaller investors. In some cases, capital must be committed upfront, which can eat into returns, or there is a custody arrangement, usually with a global bank serving as the nominee.

“If you don’t have a custody arrangement, and you don’t necessarily know or have control over the cash, it can be very hard to do a capital call,” Selby explained. “If we have a link to a client’s cash holdings, either reported by us or under our purview, we can create a buffer and ensure it doesn’t go into other strategies if there is a potential capital call pending.”

There is little difference in Escala’s approach to domestic versus international private equity, although if proximity facilitates regular dialogue with managers, that is appreciated.

On the radar

Without question, the higher interest environment has raised the bar for all managers. Escala has noted increased appetite for yield-generating private debt and larger buyout-oriented strategies at the expense of venture capital, but all target returns are now assessed relative to fixed income. With the risk-free rate rising to 4%, private equity must generate even more alpha to justify the greater risk tolerance.

Escala is still open to approaches from managers, but more could be done to smooth the way to a commitment. For example, it’s easier to get traction with clients when a product has some kind of public profile, whether that’s through conferences, podcasts, or interviews. Selby points to Howard Marks of Oaktree Capital Management as a good example, but this shouldn’t dissuade smaller players.

“It can be very powerful when a client says, ‘I’ve read about this manager and their strategy, what do you know about it?’ The biggest problem we have right now is information overload. If you can put out concise, regular information and get it picked up in Australia in any form, that helps,” he observed.

“We’ve done a lot of reverse enquiries. We invested in outstanding international managers after a couple of clients either brought them to our attention or directly asked Escala to invest in them.”

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• Topics
• Australasia
• LPs
• Fundraising
• Australia
• Escala Partners
• HNWIs
• Family office