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Unlocking investment opportunities in private markets

Smaller institutional investors have traditionally found it difficult to invest in private markets due to limited access. Titanbay CEO Thomas Eskebaek explains how its platform is helping solve the problem.

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Private markets are booming. Over the past decade, average returns on top quartile private equity funds have exceeded 20%, according to Preqin. Global private equity net asset value has grown more than seven-fold since 2002, almost double the growth in public equity markets.

With interest rates still hovering near record lows, large institutional investors have been piling into the broader private markets asset class to chase those returns, with total assets under management now more than $7tn. That is expected to expand even further to around $13tn by 2025, according to a recent report by Morgan Stanley and OliverWyman.


Yet despite the pace of growth in private markets, many smaller institutional investors have effectively been shut out of the asset class due to significant barriers to entry.

“The main challenge is access — it can be hard to get through the door in some of the best performing funds even if you can meet the minimum investment because they are so oversubscribed and they’re not particularly interested in taking on a small investor,” says Thomas Eskebaek, chief executive at Titanbay.

Some smaller investors also lack the in-house capacity and know-how to successfully navigate the market.

“How do you find those funds, how do you engage with them and then how do you do the due diligence? You need people who know what they’re doing and most investors with less than $1bn in assets under management don’t really have that resource in-house,” says Eskebaek.

Even if they do have the in-house capability and resources, building a diversified portfolio allocation strategy is prohibitively expensive for some smaller investors given the size of the equity cheques needed to gain entry to most private funds.

“If you look at portfolio construction theory, you’re typically talking somewhere between 15 and 20 funds to build a portfolio,” says Eskebaek. “Multiply that by $10m minimums each and you’re at $200m. Then assuming you allocate 20% to private markets—as many large institutions are doing—you would need $1bn in order to do that, so there’s a very large financial constraint that plays into it as well.”

While there are private market products geared towards smaller investors, they typically only offer a limited selection of funds, restricting the ability to assemble a diversified portfolio of top performing funds.

"We believe that more investors should have access to and be able to benefit from private markets"

“Most smaller institutional investors are sophisticated enough to understand that private markets are not just about exposure to one or two funds, or exposure to certain brand names - it’s about building a diversified portfolio and being strategic about it,” says Eskebaek.

Against that backdrop, Titanbay’s platform is helping to broaden access to private markets by creating feeder funds into top tier private market funds. That means Titanbay can pool capital from smaller investors and give them access to the same opportunities as the largest institutional investors.

“Because we allow our investors to invest with smaller minimums, we actually enable investors even with relatively small portfolios to build a diversified portfolio and get that professional, sophisticated allocation to private markets,” says Eskebaek. “We believe that more investors should have access to and be able to benefit from private markets, but if you’re going to do it, do it right - and that means building a diversified portfolio of top quartile funds.”

Investors can then mix and match from a dozen or so funds from each particular vintage across a spectrum of private market assets, from real estate and credit to distressed debt and buy-out funds.

“It’s not a pre-built strategy, investors can adjust their exposure as they wish,” says Eskebaek. “Let’s say you have a lot of growth investments already, maybe you want less growth and more buy-out exposure to balance it out, so you can pick and choose between the individual investment strategies and bring them into your portfolio to fit your objective.”

In addition, Titanbay provides a white-label solution for wealth management firms and private banks so they can offer their clients access to a diversified selection of top tier funds, helping their clients create their own bespoke private market portfolios. The platform also offers advanced portfolio management tools to effectively model and monitor private market investments—tools that are typically created in-house by large institutional investors and not usually available to smaller investors.

“Our technology is a critical component for wealth managers and private banks. It’s absolutely a huge part of the value proposition because it’s what enables them to look at this asset class and provide it to their clients,” says Eskebaek. “Historically it’s been very difficult for wealth managers and private banks to manage these processes and make sure it’s done correctly and compliantly, which is one of the hardest parts of this. Our platform enables our partners to do this in a compliant fashion and at scale.”

Titanbay’s platform also opens up an additional source of capital for private funds given that it has traditionally been too complicated and time-consuming for those funds to work with a larger number of smaller investors.

“You need the right systems, technology and processes in place, and for most that hasn’t been an option,” says Eskebaek. “They do see there is a market here and they also see they could benefit from these opportunities and therefore want to work with platforms like ours to do that.”

According to research by Morgan Stanley and OliverWyman, untapped capital from the high-net-worth investor segment could amount to an additional $1.5tn in assets under management.

Building a successful private market investment programme takes both time and resources, something the Titanbay platform can help take the pain out of for intermediaries and investors.

“Part of it is providing access, but that alone is not enough. It’s the access combined with the knowledge, the sophistication in due-diligence, the training, and the technology to do this well and thoughtfully that separates us from everyone else who’s out there,” says Eskebaek.

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Footnotes

[1]  Burgiss, ‘Burgiss Manager Universe Snapshot’, 30 June 2021

[2] See ‘SEC Gives More Investors Access to Private Equity, Hedge Funds’, The Wall Street Journal, 26 August 2020 and ‘BoE’s Bailey: Scrap illiquid asset cap for DC pensions’, Citywire, 27 September 2021.

[3] Preqin, ‘How Investors Are Responding to COVID-19’, blog post, 22 April 2020.

[4]  Preqin, ‘Preqin Investor Outlook: Alternative Assets, H2 2021’, 19 August 2021.

[5]  Brown, Hu, and Kuhn, ‘Private Investments in Diversified Portfolios’, January 2021. Study limited to US investors only.

[6] Gudiškis and Urbšienė, ‘The relationship between private equity and economic growth’, Ekonomika journal, Vilnius University, March 2015.

[7] Gatauwa and Mwithiga, ‘Private equity and economic growth: a critical review of the literature’, European Journal of Business and Innovation Research, June 2014.

[8] Real GDP growth rate, retrieved from Eurostat on 19 October 2021.

[9]  See Bain & Company, ‘Global private equity report 2021’, page 26.

[10]  See Bain & Company, ‘Global Private Equity Report 2010’, page 20.

[11]  Burgiss, ‘Burgiss Manager Universe Snapshot’, 30 June 2021.

[12]  Bain & Company, ‘Global private equity report 2021’.

[13]  Pantheon, ‘Diversification Study: Trend Towards More Concentrated Primary Portfolios’, July 2019. 

[14]  McKinsey & Company, ‘A year of disruption in the private markets’, April 2021. See page 14, Exhibit 8.

Important information

The views, opinions and estimates expressed herein constitute personal judgments of certain members of the Titanbay Ltd. (Titanbay) team based on current market conditions and are subject to change without notice.  This information in no way constitutes Titanbay research and should not be treated as such. Titanbay does not make investment recommendations, and no communication, including this document, should be construed as a recommendation for any security offered on or off the Titanbay investment platform. The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production.

 

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