After a slow start, alternative asset managers are finally starting to see some success with Europe’s wealthy by offering something investors crave: better liquidity.
Capital-raising is picking up with various launches of so-called evergreen funds that allow clients to periodically withdraw or contribute new capital — breaking from traditional closed-end structures that typically lock up money for seven to 12 years.
A set of rule changes by the European Commission last year has also given a boost, removing a €10,000 ($10,500) minimum investment requirement and broadening the type of assets fund managers can hold.
As a result, the market has seen a raft of product launches under the ELTIF regime — short for European Long-Term Investment Fund — with approvals of such funds having tripled to a record 62 last year across private equity, infrastructure, multi-asset and private debt strategies, official data show. Between the end of March and September alone, assets managed by 52 evergreen funds in Europe rose by 26% to €52.8 billion, according to research and consulting firm Novantigo.
With a potential $10 trillion opportunity to be tapped from Europe’s high-net-worth individuals and other small investors, fund managers are engaged in a race to mop up retail money at a time when institutional clients are hitting curbs on new capital they can allocate to private assets. At this week’s International Private Equity Market conference in Cannes — whose theme is “wealth” — investment professionals will debate how best to leverage a region that’s home to almost a third of the world’s millionaires.
The ELTIF changes have led to a “seismic shift on the demand side,” according to Andrea Vathje, who heads the Private Markets Institute of Privatize, a platform for wealth managers. The looser requirements have made it easier for discretionary portfolio managers, who make decisions on behalf of customers, to deploy funds for “hundreds of clients” in one go, she added.
Blackstone Inc.’s European private credit fund for high-net-worth individuals, ECRED, is set to reach €1.5 billion by the end of this month, tripling over the past year, Bloomberg News reported.
Read More: Blackstone Private Credit Fund Starts to Win Over Europe’s Rich
BlackRock Inc., which last year committed almost $30 billion in three transactions to transform itself into a major alternatives player, kicked off a platform in December that will let wealthy investors in Europe access its new range of private-market funds.
While the vehicles offer some liquidity — typically 5% of a fund’s net asset value can be withdrawn every quarter — some market experts are flagging risks because marketing terms such as “semi-liquid” can be misinterpreted by non-professional investors.
“Evergreen funds can appear to offer the best of both worlds,” said Maximilian Mahn, portfolio manager at HNW Family Office in Zurich. But “turning illiquid assets into a semi-liquid structure is a bit like trying to fit a square peg into a round hole.”
When markets get choppy and fund managers are overwhelmed by redemption requests, funds will have to be gated, leaving investors stuck, Mahn added.
There have also been instances where general partners have been folding assets they struggled to sell into an evergreen vehicle, passing on investment risks to less knowledgeable individual investors.
In their conference white paper, IPEM’s organizers say it’s “imperative” that asset managers don’t cut any corners: “The quality of assets in an evergreen fund must be the same as the manager’s flagship closed-ended fund.”
The ‘retailization’ of private markets has meant the need to deploy more resources to field queries from prospective clients. Platforms started by firms including Apollo Global Management Inc. and KKR & Co. provide materials, conduct webinars and live events to “educate” private bankers and financial advisers about the risks and illiquid nature of private markets.
“Many of our clients are, understandably, overwhelmed by the influx of products coming to market,” said José Cosio, who oversees Neuberger Berman Group LLC’s distribution to intermediaries outside the US. He predicts that following the current “craze,” some general partners will retreat from the wealth sector.
“When there’s a tidal wave of new launches, some funds scale successfully, while others don’t. Over time, this leads to funds collapsing or merging,” Cosio said. “I don’t think this phase is too far off.”
Written by: Leonard Kehnscherper — With assistance from Francesca Veronesi @Bloomberg
The post “Private Fund Giants Gain Traction With Europe’s Wealthy Families” first appeared on Bloomberg
