Private equity has turned into a racing Ferrari at Le Mans, winning through industry consolidation, reducing admin costs and introducing automation. Gone are the days when UHNWs would shy away from private equity as an unknown frontier. Wealth management has witnessed the whirlwind in the trust sector, accountancy practices now have their consolidator in the Cogital group and other professional practice sectors like dentistry are being rounded up. It’s not so much who but how many businesses of one type can be pulled into a PE house.
In their search for yield, UHNW clients, who are by dint of running family businesses very familiar with this model, have developed an interest to be more hands on to grow their own PE co-investments, by partnering with PE houses and other finance experts in wealth management and family offices.
The benefits of investing in private equity which although they don’t beat start-up venture capital which brings 20 per cent per annum are well known, low risk of failure, with an ROI of 12per cent annually. Viewing the successful PE consolidator model, wealthy families have worked out they also have the capital to support PE players and to take more of the financial upside but additionally the benefit to PE houses is families provide a wise and steady wingman or woman at the rudder.
Although this has not always been the case, for a long time, UHNW investors put money into funds to benefit from a managers oversight and due diligence but for many this has become a frustrating exercise because some investments “suffer from a lack of transparency and the delegation of decision making on investments is unclear ”, explains Wael Al-Nahedh, founder and CEO at Spearvest, a Swiss investment advisory firm. He added: “many UHNW investors consider now that these downsides outweigh the benefits” and as a result have become more determined to access PE deals as co-investors with the PE managers, investing directly into private companies.
Wealth shining knights
One example in recent months is the investment into SenSat, a UK drone data provider which turned down a Silicon Valley venture capital backer in favour of a group of private investors brought together by Coutts. The advantage being access to a group of mentors not just investment. This decision it seems may be a new zeitgeist.
Data theft of a different kind
One reason this may be a good idea, and not related to this deal but following some large-scale rumours emanating from Silicon Valley, which have seen unknown “venture capital investors” steal ideas and know-how once inside the company, leaving the founder/ inventor out in the cold with only cross border litigation as their friend.
Trusted relationships bring “dividends”
In order to find opportunities, “we see growing reliance on advisors and wealth managers to provide access to exclusive PE deals and to perform due diligence on their behalf”, said Al-Nahedh. Due diligence is particularly important as Al-Nahedh describes “The level of detailed due diligence needed to analyze PE deals effectively is, more often than not, beyond the experience or time capacity of the average UHNW”.
Long term view
Alexandra Daly, CEO and Founder of AA Advisors, who have been appointed on multiple global private equity mandates from the family office investor base believes that UHNWs and family offices, both single and multi are one of the most interesting and vital “limited partner” groups that are accessing PE opportunities. In her experience, “these groups have a history of being strategic and long-term investors and if they like an opportunity and appreciate the style of portfolio management, then they will be a return investor for successive fund raises”.
Despite the interest in co-investing, opportunities are sparse. “When they do occur, they are normally on an alongside investment where families or limited partners are already in the fund”, explains Daly. She sees UHNWs interested in real estate, infrastructure and social impact investing strategies. (Read more about the latest in ESG investing here). To fill the gap, “new providers have come to market enabling UHNWs to ‘shop’ for PE investments”, said Henning von Sachsen-Altenburg, Partner at law firm McCarthy Denning.
One funds driven idea is a platform called Moonfare which is just over a year old. Moonfare describes itself as being ‘on a mission to revolutionise the process of investing in private equity’. A tech-enabled platform, it has PE experienced personnel behind the scenes who have been involved with investor software and PE big brands. It enables individuals to invest in private equity funds through loading up an investor profile, as has been seen with angel investing, and to review PE funds by swipe. Entry level is much smaller at £100k than the wealth space would be working with which would demand entry level at £25mn. The fund currently has 100million euros “under management” as of May and according to Bloomberg raised $28million to grow the concept in April 2019.
“We provide UHNW individuals with a previously unseen variety of investment funds in the PE space which they can compare against each other”, said Alexander Argyros, Founder at Moonfare.
Putting the software development to one side, there has been much criticism levelled at Private Equity for its business model which eats up mom and pop businesses then takes no prisoners in its search for expansion and “growth”. Although it has also helped make many former business owners rich.
However, with the global low interest rate environment and substantial knowledge of running businesses by families, it seems this UHNW, PE and wealth managers partnership has found an interesting match. With the wisdom of long term UHNW entrepreneurs and financial engineering money wizards this might prove a steadying force and better outcome for the PE movement and wait for it... economic sustainability.