Australian HNWIs want more PE exposure, but obstacles remain - AVCJ Forum

“Many clients are coming to alternatives – private equity, venture capital, and real assets – for the first time in an investment context, so having gone through that experience, having seen the volatility dampening, provides confidence,” Martin Randall, head of alternatives at private wealth platform LGT Crestone, told the AVCJ Australia & New Zealand Forum.

LGT Crestone, which spun out of UBS in 2016 and now has AUD 25bn (USD 16.6bn) in assets under management (AUM), is one of numerous private wealth platforms to emerge in Australia in recent years. Most flag an increased appetite for alternatives among their clients, driven by rising wealth and greater sophistication, especially in terms of wealth preservation across multiple generations.

“More than any time in my career, I’ve seen stewards of wealth think about the multi-generational angle and think about investing more like an endowment,” said Paul Heath, founding partner and CEO of Koda Capital, a wealth platform established in 2014 that now has AUD 11bn in AUM.

At the same, obstacles remain to participation in private equity by the high net worth individual (HNWI) segment, otherwise known as the wholesale market.

Health also pointed to alternative assets as a volatility dampener – a means of encouraging clients to remain invested for the long term. To this end, Koda has invested in the likes of water trading rights, fishing licenses, catastrophe reinsurance, and carbon credits. All qualify as alternatives, but they also lend themselves to liquid and semi-liquid evergreen structures.

Private equity and venture capital are more challenging “because point-in-time long-dated funds are hard to put into portfolios and they don’t necessarily provide those volatility dampeners or a steady increase in value over time,” Heath explained.

In addition, a wealth management platform’s track record in private equity may not tally with what is available to clients at a certain point in time – it depends on which managers happen to be in the market. Koda doesn’t want to operate a single portfolio that is open to all investors, but for a variety of strategic reasons, it does “want it to rhyme,” Heath added.

The operational burden of managing exposure to closed-end vehicles continues to be heavy – especially for HNWIs accustomed to calling up an advisor and buying a stock. Capital calls and distributions must be addressed on an ongoing basis and this becomes increasingly complicated once a programme achieves maturity over a 5-7-year period.

“For an individual with AUD 10m or even a family office with AUD 100m, if you are allocating to closed-end funds – say five a year to get vintage, manager, and geographic diversification – after five years, you’ll have 25 funds and five capital calls a year for each one. You will be buried in administration,” said Randall.

Randall credits the proliferation of feeder vehicles and technology platforms for widening HNWI access to private equity, but he believes the portfolio management aspect – in terms of closed-end funds – has yet to be fully addressed. Education is a critical part of the puzzle, and it applies to GPs targeting HNWI investors as much as to the investors themselves.

“It’s really about learning what is important to them and understanding the operational challenges of implementing a private equity or venture portfolio,” said Leila Lee, head of distribution at Square Peg Capital, an Australian VC firm that works with many private wealth platforms and family offices.

“More than that, the devil is in the detail. How do they do things? Do they aggregate clients into one line item? Do the underlying clients invest directly but then they roll out the capital calls? Getting into the details is really important with wealth advisors because you need to know whether it’s a threshold issue and whether they can work with you or not.”

Kathryn Young, head of investments at Cambooya, an Australian family office that serves descendants of the founder of Fairfax Media, emphasised the importance of having a strong understanding and alignment with managers. She added that GPs should also be patient with family offices that often cover much ground with relatively small teams.

“Please don’t get offended when we take way too long to respond to your email. It isn’t personal, we do it to everyone,” Young said. “We are doing a lot of things. We joke that, at any given moment, a family member might buy a farm and we have to drop everything to finance that farm and figure out how many cattle they need. That happens in real life.”

Randall and Health observed that understanding how private wealth platforms allocate can help explain why they may pass on specific opportunities, including those that might ordinarily seem highly attractive.

“A strategy makes sense in the context of the other things in the portfolio today and it also makes sense in terms of the other things we are looking to add, the thematics,” said Health.

“If you can understand what it is we are looking for, and not get offended when we say no to something we’re not looking for, that’s the magic. [Because] if you have a solution that is the answer to a problem we are trying to solve in a portfolio, that’s an awesome starting point.”

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• Topics
• Australasia
• LPs
• Fundraising
• GPs
• Australia
• HNWIs
• AVCJ Events
• Koda Capital
• Crestone Wealth Management
• Square Peg Capital
• Cambooya