High returns have driven a strong interest in private equity investments which, according to McKinsey’s 2022 Private Markets Annual Review, now represent more than 6.3 trillion in AUM. This interest is not expected to wane anytime soon given that private equity has delivered a 27% return in 2021, the best return across all private markets1. Although demand has historically come primarily from institutional investors, we expect that regulatory changes, technological advances, and better distribution capabilities will make those products more accessible to retail investors. Private equity products offer accredited investors a unique opportunity to diversify away from public markets and ultimately, improve risk-adjusted returns.
We outline this trend in more detail and how to manage private equity investments as a separate asset as well as part of a client’s entire wealth management plan in our recent OpEd
Although private equity investments can be beneficial, investing in private equity is not without risk as vintage, region, segment, and manager selection can have a tremendous impact on returns. Hence, proper due diligence is necessary. Private equity investing can also create a host of operational challenges, which without the proper technology, can make it more difficult and costly for advisors to operate.
Among the most important issues it is crucial to note:
- The difficulty of sourcing fund data for different managers. Data aggregation can be challenging because private equity managers tend to send fund information in unstructured formats that are harder to consume by third-party tools.
- The complexity of processing private equity transactions, especially when multiple commitments and recycled distributions are involved.
- The complexity of producing the necessary performance and risk analytics.
- Documentation management is more involved as legal agreements must be signed and stored.
Furthermore, managing diversified portfolios that include private equity investments requires pro-active liquidity and risk management. Private equity investments tend to be illiquid, which brings forth a host of factors. As a result, adding private equity products to an investment portfolio normally imply the need to:
- Temporally manage asset allocation. When a capital commitment is made, this decision will invariably impact the client’s asset mix in the future as capital calls are fulfilled. Consequently, it’s critical to project asset allocation through time.
- Manage liquidity over longer investment horizons. This is because:
- Several structures have pre-determined liquidity windows, which time bands the period and amounts for which liquidity can be obtained.
- Making capital calls may require other investments to be sold, which can have tax implications. They may also require injection of new funds.
- Manage assets and liability mismatch. Although mostly illiquid, legacy private equity products can generate significant cash flows that can be used to finance future expenses or to repay debt. As a result, these types of investments can be a key component of your financial plan.
Finally, reporting on private equity products requires a set of advanced analytics to measure and compare performance and risk. Those analytics are normally not the “core strengths” of legacy wealth management platforms.
Advisors typically have a tech platform that is private equity specific, or one that can handle all other wealth management needs, but not both. As the demand for private equity investments increases, firms and their advisors must have up-to-date technology that effectively manages them in order to meet the increasing expectations of their clients. Today’s advisors must be able to oversee all wealth management vehicles within one platform so they can manage entire portfolios holistically and provide real-time, detailed performance analytics and insights.
What do we do?
d1g1t is a comprehensive, modern wealth management platform that facilitates the administration, management, and reporting of multi-asset class portfolios that include private equity investments. d1g1t manages private equity investments both individually and as part of a diversified investment strategy. The software offers real-time metrics associated with private equity investments including distributions, contributions, and overall cash flow projections. d1g1t’s clients are family offices and high-net-worth advisors who have significant investments in private equities. Billions of dollars in private equity investments are currently managed on the platform.
The software includes advanced analytics and other capabilities that meet the needs of the most sophisticated advisors, including the ability to:
- Facilitate the aggregation and reconciliation of data from multiple sources (custodians, PE managers) into a single, well-organized, data hub from which dynamic performance and risk reports can be generated in real-time.
- Enable the collection and storage of agreements and documents.
- Produce analytics designed to:
- Track capital commitments, paid-in-capital, net capital invested, and remaining callable capital.
- Produce performance ratios:
- Distribution to Paid-in-Capital (DPI): The ratio of the capital distributed by the fund over the capital contributed to the fund.
- Residual Value to Paid-in-Capital (RVPI): The ratio of the residual value over the Paid-in-Capital.
- Total Value to Paid-in-Capital (TVPI): The ratio of the total economic value of the investment over the Paid-in-Capital.
- Measure returns using both time-weighted and an internal rate of returns (IRR) methodology across any desired time period.
- Project capital calls and portfolio liquidity.
- Simplify performance comparison across funds, managers, strategy, vintage, and sectors.
- Expedite the generation of specialized reports.
Most importantly, the platform is designed from the onset to help you share information with your clients in real-time, through an integrated client portal designed to showcase complex portfolios that include both public and private assets.
Investing in private equities can be very accretive to high-net-worth investors looking to improve long-term risk-adjusted returns. It can also be beneficial to advisors who use private equity to attract new clients or to raise new capital from existing clients.
However, investing in private equity products comes with a host of operational challenges that can only be addressed through a high-quality wealth management infrastructure. Leading firms embrace digital transformation that not only delivers more advanced analytics, but also propagates those analytics to their investor portal. This data driven approach allows advisors and investors to anchor their relationship on transparent analytics they can trust. Contact the d1g1t team by emailing firstname.lastname@example.org to learn more about the platform and how our software will dramatically improve your portfolio management and client management capabilities.
1IRR of 27 percent in 2021 according to McKinsey & Company
Benoit Fleury ,
Chief Product Officer & Co-Founder