The ongoing search for high yields has drawn investors to the potential of private equity, whose key players have historically outperformed the market. Emerging technological solutions aim to make such opportunities more accessible and transparent.

The three speakers invited to discuss the topic on Tuesday 5 March at the branch office of Piguet Galland private bank in Geneva embody recent joint efforts by professionals in the fields of finance and digital technologies to provide more investors with access to the most efficient private equity funds. Typically, such asset class have been only accessible “as things currently stand to the largest banks and institutions” says Daniel Varela, CIO of Piguet Galland.

 

The exclusion of most private banks from the market extends a fortiori to private investors, represented at the round table by Daniel R., a former commodities trader who is “interested in the potential of private equity” but deplores its poor accessibility. An opening could come from digital solutions such as the one developed by fintech firm Moonfare, whose founder Alexander Argyros presented his solution for pooling investments and simplifying onboarding processes. A key challenge: democratizing access to the top 20 private equity funds specializing in buyouts. Such funds maintain annual returns of 20% or more.

High-potential insider market

The paradox touched upon by all stakeholders is the relatively moderate development of private equity, in a context of depressed returns on equity and bond markets. Investor Daniel R. considers the cost of the entry ticket, ranging from 250,000 dollars for some small funds to as much as 10 million for the most successful actors in the sector such as KKR or Blackstone, a primary obstacle.

 

This distinction is fundamental according to Daniel Varela, who notes a “wide range of profitability” between the various funds. “The key factor in choosing a private equity fund is its ability to outperform over time. This point is all the more important because offloading a position can result in a discount, or even render the sale impossible”. The requirement of large investment sums in order to access the best funds is obviously an entry barrier, and makes it difficult for a private bank to advise its clients on private equity fund options, “with which most private bankers are not necessarily very familiar”, says Daniel R. Moreover, since the investment is tied up between 8 and 12 years, illiquidity is a sensitive issue for investors who, as Daniel R. explains, also experience “difficult access to information”. Such factors also give private equity a reputation for being elitist.

Future normalization of private equity?

Alexander Argyros, founder of Moonfare and a former member of KKR, agrees with this analysis. “Private equity is often misunderstood and suffers from a lack of transparency. However, opening up to retail clients is now part of the strategy of larger funds”. In order to bridge the gap between these two worlds, Moonfare offers private investors a digital platform to simplify requests and keep informed.

 

Daniel Varela admits to “looking carefully at this kind of initiative”, even if it runs the risk of lowering margins in the event of a sharp increase in the volume of investments in the sector. Daniel R. is, for his part, not fearful of such a scenario, considering that “volume will compensate”, and that the development of secondary markets “would provide a welcome signal”.

 

However, imagining private equity fully entering the ranks of market performance is not yet on the agenda, according to Alexander Argyros. “There are 4,000 listed companies for millions of unlisted companies. The potential is huge and it is not possible to imagine a perfectly liquid private equity market in the medium term. On the other hand, it should be possible to expect sustainable returns that outperform the markets of listed equities and hedge funds”.

 

More generally, all stakeholders agree that private banks have a strong interest in working hand in hand with fintech, facilitating their clients’ access to this asset class and accompanying them in their investment decisions.

 

This is certainly Daniel Varela’s view. “For a medium-sized private bank, it would not make sense to build our own platform. Setting up partnerships with fintech firms represents a logical next step”.

 

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