Industry
How to unlock liquidity in private market portfolios
Feb 27, 2024
For investment professionals only.
Early February brought with it Q4 2023 earnings for some of the biggest alternative asset managers, shining a light on what each expects the future will hold for private markets. Apollo’s CEO, Marc Rowan, thinks the days of a 60/40 portfolio split are behind us and that investors no longer perceive stocks and bonds to be safer than private investments. "I believe we're moving to a world where public is both safe and risky, and private is safe and risky; and the difference is only a matter of liquidity," he told investors. This shift in investors’ mindset will drive capital from both institutions and individuals towards private markets, according to Rowan.
Liquidity, as Rowan highlights, is a key consideration when it comes to private market investments. Private market investments are typically illiquid and long-term, requiring an investor to sit tight in many cases for a decade or longer. As such, LPs with stakes in various investment vehicles have finite options when it comes to exiting early or rebalancing their portfolios. This is particularly problematic in a climate like last year’s, which was rife with macroeconomic headwinds and slowing growth.
In 2023, private equity exits hit record lows – down 27% compared to 2022. This sparked a boom in secondaries as investors sought more liquidity to respond to changing financial needs and market conditions. As a result, the secondaries market topped $114bn in 2023 – an increase of $11bn on the year before. Demand is expected to continue into this year as LPs and general partners (GPs) look for liquidity against a backdrop of ongoing uncertainty.
Demand for liquidity grows as PE exits hit record low
Source: PitchBook data / Geography: US / *As of September 30, 2023
Capitalising on secondary market opportunities
Private banks and wealth managers that can facilitate a frictionless sale of secondary positions, thereby unlocking liquidity in private markets portfolios, are well placed to capitalise on this boom. But for most, that’s easier said than done.
Secondaries are currently sold client-to-client within a closed ecosystem, and it’s far from a feature all wealth advisors have access to. For the minority that can pair buyers and sellers, the process is often unwieldy and time consuming; negotiations and legal transfers of ownership can take the better part of a year.
Streamlining this process is a commercial imperative. While historically the discounts available to buyers on the secondary market were enough to incentivise their engagement with it, rising demand means that sellers are increasingly achieving near to their asking prices. A fast, frictionless process will not only act as a competitive differentiator for private banks and wealth managers, but could itself help to incentivise buyers and drive liquidity.
The value of blockchain
Technology provides a potential solution but is, of course, far from the only innovative solution to the liquidity problem, and we’ve seen the market respond creatively with structures that offer hybrid liquidity, such as evergreen funds.
For those embracing the technology route though, legacy tech stacks have proven to be something of a stumbling block. Most simply weren’t built with a secondary market in mind, and even those that are available within institutions often lack much needed functionality, such as the ability to liquidate a portion of a client’s holding.
Advances in technologies like blockchain can change that. Leveraging blockchain and the benefits of tokenization, advisors could quickly integrate a secondary marketplace into their systems without the need to engage in a lengthy transformation project or overhaul existing tech. Blockchain is particularly well suited to this use case since it offers a host of benefits, among them efficiency, transparency and fractionalisation.
Functionality like smart contracts allow for automation, speeding up transaction times from months to minutes. They can enforce pre-defined rules and conditions, ensuring compliance and fund transfer protocols that reduce the need for intermediaries and take the pressure off advisors managing these transactions. Similarly, fractionalisation allows for a much more dynamic experience for both advisors and clients, enabling the sale of a portion of a holding for those clients who aren’t committed to selling 100% of their position.
If these infrastructure benefits of blockchain are combined with a white label platform that supports private banks and wealth managers looking to offer competitive secondary trading, the results could be transformative. This is one potential solution to the liquidity challenge: an accessible interface where private wealth advisors can manage LP stakes, and clients can access their investments.
Increasing access to private markets
A blockchain-enabled secondary marketplace has the potential to not only improve the experience of existing clients – saving advisors’ time in the process – but could act as a competitive differentiator when attracting investors who have yet to meaningfully enter the market.
High and ultra-high net worths are underrepresented in alternatives and offer a sizable growth opportunity. By our calculation, opening up this market to individuals could generate inflows of $17.2trn, and improvements in liquidity, transparency and access are key to attracting those investors.
—
Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.
Industry
How to unlock liquidity in private market portfolios
Feb 27, 2024
For investment professionals only.
Early February brought with it Q4 2023 earnings for some of the biggest alternative asset managers, shining a light on what each expects the future will hold for private markets. Apollo’s CEO, Marc Rowan, thinks the days of a 60/40 portfolio split are behind us and that investors no longer perceive stocks and bonds to be safer than private investments. "I believe we're moving to a world where public is both safe and risky, and private is safe and risky; and the difference is only a matter of liquidity," he told investors. This shift in investors’ mindset will drive capital from both institutions and individuals towards private markets, according to Rowan.
Liquidity, as Rowan highlights, is a key consideration when it comes to private market investments. Private market investments are typically illiquid and long-term, requiring an investor to sit tight in many cases for a decade or longer. As such, LPs with stakes in various investment vehicles have finite options when it comes to exiting early or rebalancing their portfolios. This is particularly problematic in a climate like last year’s, which was rife with macroeconomic headwinds and slowing growth.
In 2023, private equity exits hit record lows – down 27% compared to 2022. This sparked a boom in secondaries as investors sought more liquidity to respond to changing financial needs and market conditions. As a result, the secondaries market topped $114bn in 2023 – an increase of $11bn on the year before. Demand is expected to continue into this year as LPs and general partners (GPs) look for liquidity against a backdrop of ongoing uncertainty.
Demand for liquidity grows as PE exits hit record low
Source: PitchBook data / Geography: US / *As of September 30, 2023
Capitalising on secondary market opportunities
Private banks and wealth managers that can facilitate a frictionless sale of secondary positions, thereby unlocking liquidity in private markets portfolios, are well placed to capitalise on this boom. But for most, that’s easier said than done.
Secondaries are currently sold client-to-client within a closed ecosystem, and it’s far from a feature all wealth advisors have access to. For the minority that can pair buyers and sellers, the process is often unwieldy and time consuming; negotiations and legal transfers of ownership can take the better part of a year.
Streamlining this process is a commercial imperative. While historically the discounts available to buyers on the secondary market were enough to incentivise their engagement with it, rising demand means that sellers are increasingly achieving near to their asking prices. A fast, frictionless process will not only act as a competitive differentiator for private banks and wealth managers, but could itself help to incentivise buyers and drive liquidity.
The value of blockchain
Technology provides a potential solution but is, of course, far from the only innovative solution to the liquidity problem, and we’ve seen the market respond creatively with structures that offer hybrid liquidity, such as evergreen funds.
For those embracing the technology route though, legacy tech stacks have proven to be something of a stumbling block. Most simply weren’t built with a secondary market in mind, and even those that are available within institutions often lack much needed functionality, such as the ability to liquidate a portion of a client’s holding.
Advances in technologies like blockchain can change that. Leveraging blockchain and the benefits of tokenization, advisors could quickly integrate a secondary marketplace into their systems without the need to engage in a lengthy transformation project or overhaul existing tech. Blockchain is particularly well suited to this use case since it offers a host of benefits, among them efficiency, transparency and fractionalisation.
Functionality like smart contracts allow for automation, speeding up transaction times from months to minutes. They can enforce pre-defined rules and conditions, ensuring compliance and fund transfer protocols that reduce the need for intermediaries and take the pressure off advisors managing these transactions. Similarly, fractionalisation allows for a much more dynamic experience for both advisors and clients, enabling the sale of a portion of a holding for those clients who aren’t committed to selling 100% of their position.
If these infrastructure benefits of blockchain are combined with a white label platform that supports private banks and wealth managers looking to offer competitive secondary trading, the results could be transformative. This is one potential solution to the liquidity challenge: an accessible interface where private wealth advisors can manage LP stakes, and clients can access their investments.
Increasing access to private markets
A blockchain-enabled secondary marketplace has the potential to not only improve the experience of existing clients – saving advisors’ time in the process – but could act as a competitive differentiator when attracting investors who have yet to meaningfully enter the market.
High and ultra-high net worths are underrepresented in alternatives and offer a sizable growth opportunity. By our calculation, opening up this market to individuals could generate inflows of $17.2trn, and improvements in liquidity, transparency and access are key to attracting those investors.
—
Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.
Industry
How to unlock liquidity in private market portfolios
Feb 27, 2024
For investment professionals only.
Early February brought with it Q4 2023 earnings for some of the biggest alternative asset managers, shining a light on what each expects the future will hold for private markets. Apollo’s CEO, Marc Rowan, thinks the days of a 60/40 portfolio split are behind us and that investors no longer perceive stocks and bonds to be safer than private investments. "I believe we're moving to a world where public is both safe and risky, and private is safe and risky; and the difference is only a matter of liquidity," he told investors. This shift in investors’ mindset will drive capital from both institutions and individuals towards private markets, according to Rowan.
Liquidity, as Rowan highlights, is a key consideration when it comes to private market investments. Private market investments are typically illiquid and long-term, requiring an investor to sit tight in many cases for a decade or longer. As such, LPs with stakes in various investment vehicles have finite options when it comes to exiting early or rebalancing their portfolios. This is particularly problematic in a climate like last year’s, which was rife with macroeconomic headwinds and slowing growth.
In 2023, private equity exits hit record lows – down 27% compared to 2022. This sparked a boom in secondaries as investors sought more liquidity to respond to changing financial needs and market conditions. As a result, the secondaries market topped $114bn in 2023 – an increase of $11bn on the year before. Demand is expected to continue into this year as LPs and general partners (GPs) look for liquidity against a backdrop of ongoing uncertainty.
Demand for liquidity grows as PE exits hit record low
Source: PitchBook data / Geography: US / *As of September 30, 2023
Capitalising on secondary market opportunities
Private banks and wealth managers that can facilitate a frictionless sale of secondary positions, thereby unlocking liquidity in private markets portfolios, are well placed to capitalise on this boom. But for most, that’s easier said than done.
Secondaries are currently sold client-to-client within a closed ecosystem, and it’s far from a feature all wealth advisors have access to. For the minority that can pair buyers and sellers, the process is often unwieldy and time consuming; negotiations and legal transfers of ownership can take the better part of a year.
Streamlining this process is a commercial imperative. While historically the discounts available to buyers on the secondary market were enough to incentivise their engagement with it, rising demand means that sellers are increasingly achieving near to their asking prices. A fast, frictionless process will not only act as a competitive differentiator for private banks and wealth managers, but could itself help to incentivise buyers and drive liquidity.
The value of blockchain
Technology provides a potential solution but is, of course, far from the only innovative solution to the liquidity problem, and we’ve seen the market respond creatively with structures that offer hybrid liquidity, such as evergreen funds.
For those embracing the technology route though, legacy tech stacks have proven to be something of a stumbling block. Most simply weren’t built with a secondary market in mind, and even those that are available within institutions often lack much needed functionality, such as the ability to liquidate a portion of a client’s holding.
Advances in technologies like blockchain can change that. Leveraging blockchain and the benefits of tokenization, advisors could quickly integrate a secondary marketplace into their systems without the need to engage in a lengthy transformation project or overhaul existing tech. Blockchain is particularly well suited to this use case since it offers a host of benefits, among them efficiency, transparency and fractionalisation.
Functionality like smart contracts allow for automation, speeding up transaction times from months to minutes. They can enforce pre-defined rules and conditions, ensuring compliance and fund transfer protocols that reduce the need for intermediaries and take the pressure off advisors managing these transactions. Similarly, fractionalisation allows for a much more dynamic experience for both advisors and clients, enabling the sale of a portion of a holding for those clients who aren’t committed to selling 100% of their position.
If these infrastructure benefits of blockchain are combined with a white label platform that supports private banks and wealth managers looking to offer competitive secondary trading, the results could be transformative. This is one potential solution to the liquidity challenge: an accessible interface where private wealth advisors can manage LP stakes, and clients can access their investments.
Increasing access to private markets
A blockchain-enabled secondary marketplace has the potential to not only improve the experience of existing clients – saving advisors’ time in the process – but could act as a competitive differentiator when attracting investors who have yet to meaningfully enter the market.
High and ultra-high net worths are underrepresented in alternatives and offer a sizable growth opportunity. By our calculation, opening up this market to individuals could generate inflows of $17.2trn, and improvements in liquidity, transparency and access are key to attracting those investors.
—
Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.