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Robert Picard unravels the misconceptions surrounding private markets
Key Takeaways
- Advisors need to be mindful that investor perceptions of private markets may have been shaped by earlier negative experiences.
- Many may perceive fees in private markets as excessive, but private fund managers are compensated largely based upon performance, and higher fees may be justifiable if they generate better risk-adjusted returns, net of fees.
- It is important to remember that - in most cases - a share of fees are attributable to important due diligence processes for underlying companies, which are vital to fund managers generating returns.
Transcript
My name is Robert Picard. I head up private market solutions at Hightower Advisors. Hightower is a community of 135 separate advisor businesses and wealth management firms spread across the United States in approximately 34 different states.
What I found in my experience dealing with both our wealth management teams and our clients is that there's a wide spectrum of reaction to private markets, and a lot of that reaction is entirely dependent on their actual real-life experience investing in private markets. We have some teams that have been investing now for almost 20 years in private credit, private real estate, and private equity, who've had excellent returns, who've outperformed public equity and public fixed income markets. But then, we've unfortunately also had some clients and their wealth management teams who've either had poor returns, lower returns, they've had high-fee products, and or just been misled. They might have had exposure to Bernie Madoff, they might have had exposure to FTX most likely, or others. And, you know, it's really important for us to determine where that experience came from and then demonstrate that with a team of seasoned professionals and choosing really the best active money managers available, you won't run into that problem in the future and you'll ultimately end up with a portfolio of best-in-class active managers who are investing in some of the best money managers and or best companies in our country. That's one example.
The other experiences, as I alluded to, which is just high fees, and that's sort of been a buzzword. Now the good news is the SEC separately has come out with recent regulations that are very much in favor of wealth managers and their clients. It forces the private fund management community to be much more transparent with their fees. But that said, to a certain degree, those fees are justified.
Now explain why. First of all, we look at net returns, after-fee returns as long as the after-fee returns are still elevated and positive, that to a certain degree is what we really focus on.
And then lastly, this is really critical, you’re investing in private companies. If you're investing in a private company that's still led by a founder and that company goes into some sort of distress, I don't want that manager to hesitate to jump on a plane, spend the money, go visit the company if he has to stay 100 days in to help restructure, help the factory, or help the owner or help the founder improve his business. I think it's really critical that he have the wherewithal and most importantly, my mother always used to say, penny wise, dollar foolish. And what I'm getting at is we need to make sure that our teams and our fund managers have the ability to spend money as needed to specifically help these companies grow and ultimately be rewarded with higher returns.
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