Market access

Technology helps businesses meet customer demand for private market access

Wealth management companies need to adapt to make it easier for clients to access private market assets, and technology plays a big role in how this is done.

This news service has noted how various companies are trying – they say – to expand access to previously hard-to-grasp asset classes, such as private equity. We reported on the activities of companies such as CAIS and iCapital Network, for example (both are headquartered in the United States). Fintech firm Delio, a UK-based company with offices around the world, takes a closer look at the space. The author is Gareth Lewis, who founded Delio in 2015 and is its managing director.

The editors are happy to share these views and invite responses from readers. The usual editorial disclaimers apply. To respond, email [email protected]

Traditionally, private market investment has been viewed as the prerogative of institutional or very high net worth investors. However, the tide is turning.

Over the past decade, customer demand for private markets has accelerated rapidly. This has forced many financial institutions to modernize their traditional and long-standing approach to alternative assets. As a result, they’ve had to transform the way they present unlisted investment opportunities to their clients – and technology has been at the heart of this transformation.

Investors turn to private investment
Before focusing on how businesses can expand customer access to private markets, it’s important to note why alternative assets are thriving. The most obvious answer is that private markets have generated impressive and consistent returns during recent periods of economic instability. Over the longer term, private equity has remained the most profitable asset class since 2006.

As a result, alternative investment opportunities that were once considered too risky are now in high demand. Investors have taken a longer-term approach to how their capital is deployed and have a greater risk appetite than a decade ago, which is part of the reason why, in the UK alone , private equity investment reached its highest level in five years. , according to KPMG.

The market itself shows no signs of slowing down. PwC predicts that global private market AUMs will increase to $ 5.5 trillion by 2025. Depending on the rate of post-COVID economic recovery, this could see the total value of private market AUMs reach $ 15 trillion over the next three years.

These factors mean that investors have started to view private markets as an important way to diversify their portfolios. With their longer-term focus, alternative investments are seen to be more resilient to external factors like COVID-19 and inflation compared to public markets. If they are not immune to global, political and social instability, the consequences are usually much less severe due to the longer-term commitment of investors to them. Yet despite promising returns and growing demand, many financial companies have been slow to respond to develop a customer offering in this space.

Strong demand prompts financial institutions to adapt
It’s fair to say that private markets are skyrocketing. Nonetheless, many financial firms have failed to modernize their traditional operating models, which means they lack the staff and resources to meet growing client demand for this type of investment. .

Historically, a company’s offering in the private markets was likely to be driven by personal relationships, paper-based processes, and one-on-one meetings. Common operational challenges include implementing robust governance processes for transaction distribution, accurate investor profiling, and overcoming outdated document and data management systems that make it difficult to effectively audit processes. In fact, nearly two-thirds of companies identified regulatory compliance as one of the biggest barriers to delivering a private market proposition to customers.

It is vital that companies find a solution to these challenges, as the demand for private markets is only expected to increase further and regulators are already responding to this change. Last year, the United States Securities and Exchange Commission broadened the definition of an “accredited investor” to include investors who would not have previously been qualified. Likewise, the FCA recently decided to push forward proposals for a new UK licensed open-ended investment fund that would allow sophisticated investors better access to private equity assets.

As a result, companies should consider digitizing their offering in the private market. Automating certain aspects of the investment process not only improves operational efficiency, but also helps create consistency and mitigate risk. When combined, these procedural gains will allow financial institutions to expand their offering in the private market beyond the “usual suspects” – exclusive groups of very high net worth investors.

Digitization is fundamental to develop private markets
The push towards digitalization of the private investment sector has moved quickly in the wake of the pandemic, with nine out of 10 financial institutions stating that they have accelerated their digitization strategy as a result.

Additionally, globalization means that high net worth clients are now rarely based in a specific location. As busy entrepreneurs and professionals, they are often on the move and increasingly need 24/7 access to their portfolios, which means digital engagement is vital.

The increasing use of technology is also freeing up counselors and relationship managers to provide additional services that cannot be handled by automation. If deployed effectively, it can allow staff to add value for customers and do more rewarding work, while “heavy administrative burdens” are handled in a more streamlined manner. For clients and businesses alike, this approach offers a more efficient, pragmatic and rational approach to the challenge of democratizing private markets.

While the improvements offered by digitization from an operational standpoint are apparent, better use of technology has the potential to deliver breakthrough benefits by improving advisor-client relationships. Through real-time analytics and more transparent data, previously inaccessible customer information can be generated, which will create significant value from a business perspective. This can range from engaging clients with specific types of investments to identifying potential blockers that are preventing clients from engaging with an investment opportunity. In short, a true view of client data helps advisors understand their investment preferences and behavior at a level never seen before.

Now is the time to modernize
Given the growing and constant demand for private markets over the past decade, financial companies can no longer hesitate to modernize their customer offering. Whether their goal is to promote investment opportunities more effectively or to strengthen their regulatory processes, digital tools will be essential for companies to improve access to alternative assets.

While there has undoubtedly been an acceleration in the number of companies adopting technical solutions, much remains to be done. Some financial services, such as banking and insurance, have undergone a technological revolution over the past decade; however, the process of digitizing private markets (and more broadly the wealth management sector) is still in its infancy.

This development is already underway. Financial firms that do not modernize their approach risk losing ground to their competitors and alienating their customers. As private markets become more accessible, institutions must embrace the role that technology plays to ensure they are able to meet this demand. If they don’t, chances are high that clients will quickly start looking elsewhere for the private market opportunities they seek.

About the Author
Gareth Lewis is the CEO and co-founder of Delio, a fast growing fintech operating in the private market space. The company works with more than 90 clients, including some of the world’s largest financial institutions. Lewis is a Chartered Accountant and was recognized by ICAS as one of the UK’s Top Young CAs in 2019. Prior to founding Delio, he worked for EY, IBM and Convex Capital, a mergers and acquisitions consultancy. Delio has offices in Cardiff (its headquarters) and in London, Geneva, Singapore, Dubai and New York.