Advisors Start Cramming to Meet Growing Private Market Demand

Time to hit the books.

Private markets have the potential for great returns, and they have historically outperformed public ones. Many advisors steer clear of them, however, partially because of limited knowledge about how they actually work. It’s an information gap many will have to address sooner rather than later.

Apollo Global Management CEO Marc Rowan believes that allocations to private equity and private credit will make up a third of client portfolios in the near future. “The vast majority of financial advisors may not go to private markets directly, [but] they will buy products that give them access to public and private markets,” he said during a Q&A at the Morningstar Investment Conference last week. 

If advisors are to stay competitive in Rowan’s vision of the future, many are going to need a private markets crash course.

Study Hall

Right now, advisors allocate an average of just 5% of clients’ portfolios to alternatives, compared with 25% by institutions, according to Fidelity. Part of the gap is due to limited access, since private markets are typically restricted to accredited investors. But unfamiliarity also plays a big role. Private markets are complicated territory. 

“You can’t just enter a ticker on a platform and execute transactions,” said Laura Lutton, head of manager research at Morningstar, adding that private market investments often require separate investment platforms and client agreements. “It creates a structural friction that keeps advisors reluctant to get involved,” she told Advisor Upside. 

Private markets also come with lower liquidity, less transparency, and complex fee structures — challenges that can be difficult to explain to clients. “It sounds simple, but it’s really not,” Lutton said. Morningstar is working to make those conversations easier by expanding its Medalist Rating framework later this year to include semiliquid funds, offering more transparency and helping identify strategies likely to outperform certain benchmarks.

While, private markets may seem daunting, but advisors don’t have to go it alone:

• One way advisors can become more familiar with private equity and private credit is through sponsors themselves. Major firms like BlackRock, KKR, iCapital and more offer CE credits through alternative investing courses.
• The CFA Institute also offers multiple courses and certifications on private markets.

Do Your Homework. Some advisors are taking the independent study approach, like Alex Caswell of Wealth Script Advisors, who’s been reading books and scholarly articles published in the CFA Institute’s Financial Analysts Journal to understand whether the investments would be right for his clients. So far, he’s not sold on them, especially private credit. 

“PC has swallowed up a lot of the fast-and-loose loan and debt origination that was done by banks pre-2008,” he told Advisor Upside. “Now, these PC funds are being shoved into portfolios left and right, and it comes with a lot of unevaluated risks that people aren’t realizing.”