Demand for access to private markets is increasing among private wealth clients in the UK for a multitude of reasons, from portfolio diversification to the pursuit of attractive returns. As a result, UK wealth managers and private banks are looking for opportunities in private markets to meet client demand.
Recent updates to the LTAF regulation aim to support increased demand by making private funds more accessible to non-institutional investors. However, distributors still face a number of challenges that inhibit them from offering a comprehensive service to their clients due to a lack of platform support for private funds in the UK.
In this insight, we will analyse these challenges and identify the solution: homogenised market infrastructure that can digitally connect asset managers, transfer agents, and distributors, and can therefore support a fully digitised end-to-end investment journey for private wealth clients. Read on to discover how Euroclear’s FundsPlace offering is providing this solution.
Why are distributors turning to private markets?
Investors are demanding greater access to private funds as they seek out strong returns and portfolio diversification. As public markets face the effects of fluctuating world conditions, including a pandemic and a war in Europe, private asset investments and their illiquidity can provide a more stable opportunity for predictable returns.
Statistics show that many companies are remaining private for longer periods of time. By doing this, they can see their prime value creation phase pre-IPO. In fact, the number of private companies now outweighs that of public companies. By remaining private for longer, management teams are able to retain control and strategic direction without the increased overheads that publicly-listed businesses experience.
Additionally, regulators are working to launch and update fund structures to facilitate access to these assets for a much broader group of investors. For example, the UK-based Long-Term Asset Fund (LTAF) is a semi-liquid fund structure providing the framework to support increased demand and the more complicated nature of private market investments.
While this fund structure was originally designed to support DC pension schemes, recent updates from the FCA broadened LTAF regulations to further increase access for retail investors. Managers are therefore incentivised to launch LTAFs to access a growing pool of capital. Managers who have already launched LTAFs to take advantage of this opportunity include Schroders, Aviva, and BlackRock.
The LTAF will support private banks and wealth managers by reducing operational barriers, lowering the minimum investment amount, and aligning investor classification requirements. Investors also benefit from greater protection under a regulated fund structure.
Evidently, the investment landscape is shifting. Individual investors are considering how a diversified portfolio might provide resilience against fluctuating economic and geopolitical conditions. However, a multitude of challenges continue to limit access to this asset class in the UK, largely stemming from the lack of platform support for private market funds.
No platform support for private market funds
In the UK, funds platforms generally support daily dealing, but not the more complex nature of private market funds, including capital calls, subscriptions, nominee account breakdowns, and more. With no industry-wide, market-neutral platform to support private market funds, a number of challenges present themselves.
First, a lack of platform support means a lack of digitisation. The investment lifecycle for private funds is complex and involves a lot of off-system, manual processes. Without digitisation, managers cannot scale their operations to meet distribution demand efficiently, therefore increasing the cost of capital.
Moreover, operational inefficiency and a lack of standardisation in the investment process creates operational risk, especially relating to capital calls and other non-standard settlement processes.
Second, with no widely-adopted platform for private market funds, there is no standardised process for gaining access to these funds. Access is limited as it needs to be negotiated bi-laterally, which is time consuming and cost-inefficient. With such hold ups and inefficiencies, it is difficult for discretionary portfolio managers and private equity investment trusts to offer a full service of benefits to their private wealth clients.
Finally, a lack of standardised reporting creates pain points for all market participants. Reporting is generally shared manually and off-system and quickly becomes outdated, therefore inhibiting investors and discretionary portfolio managers from making well-informed decisions.
On the other side of the equation, UK private equity firms are tasked with providing enhanced transparency and timely reporting that adheres to stringent compliance measures. A considerable amount of manual effort and organisation is required from fund managers and their associated service providers to remain accountable to these requirements.
To overcome the above challenges, industry-wide market infrastructure is required with a platform to support private market fund subscriptions, capital calls, and real-time, standardised reporting.
Euroclear FundsPlace: a comprehensive solution
Euroclear FundsPlace provides a solution to the above challenges by providing resilient, market-neutral infrastructure to support all fund types, from ETFs and mutual funds, to private market funds.
Through its FundsPlace offering, Euroclear provides a platform for private market funds that digitises the entire investment journey from investor onboarding to capital calls and reporting. This platform allows clients to invest in private funds of their choosing across diverse strategy types through their existing FundSettle account.
This solution represents the digital infrastructure that private markets need; a platform for private funds that supports investor onboarding, subscriptions, capital calls, distributions, and standardised, real-time reporting.
Wealth managers can utilise either FundSettle via Euroclear FundsPlace, or the Goji Whitelabel Platform (GWP) to bring funds ‘on platform’. Together, FundSettle and the GWP support listed, semi-liquid, closed-ended, and direct/co-investment funds, covering a broad spectrum to provide a comprehensive solution.
By connecting with fund managers via Euroclear FundsPlace, UK wealth managers and private banks can provide comprehensive access to private funds to their clients, including a seamless investment journey and standardised reporting to support timely and effective investment decisions. As a result, distributors are supported in meeting ever-increasing client demand.
To learn more about Euroclear FundsPlace or the GWP, fill in our contact form here.