According to Pictet Alternative Advisors, there has been a growth in demand for alternative investment products amongst private clients, with a notable increase in allocation to private equity.
The growth in demand is being driven by necessity rather than a particular peak in interest, says Heinrich Adami, equity partner at Pictet Wealth Management. Adami adds that the move towards alternative investment allocations is due to poor performance from traditional investments, alongside promising past performance from alternatives. However, he also says that high net worth investors will have to be careful as to whether they can take on the extra liquidity constraints that alternatives such as private equity impose.
Nicolas Campiche, CEO of Pictet Alternative Advisors, says that over the last three years, alternatives have been a way for Pictet to attract new private client prospects. He says that amongst ultra high net worth (UHNW) clients, alternatives are playing a significant part in portfolios:
“Large clients have a significant allocation to alternatives. Conservative clients have around 20% allocation and clients who are keener on alternatives allocate around 50%.”
Pictet Alternative Advisors is an independent company within the Pictet Group which focuses on alternative investments (the core being private equity, hedge funds and real estate investments). The total AuM of Pictet Alternative Advisors is just over $20bn, and stands as one of the largest private equity providers in Europe.
Maurizio Arrigo, head of private equity at Pictet Alternative Advisors, says that the company has 25 years of experience in the alternatives space, and that this experience is essential for selecting the right private equity funds, as well as selecting the right hedge fund managers.
Arrigo suggests that private equity strategies have become popular with private clients due to the assets being more tangible. He says:
“With private equity, you’re buying into real companies, and the assets are tangible. This is what people are looking for. The underlying companies that are being invested in aren’t changing every day.”
Arrigo says that the low cost of debt is advantageous for private equity strategies. He says:
“The cost of debt has changed significantly from 2008. When looking at leveraged buyouts, re-investing in companies costs far less. People often forget to take this into account.”
However, Arrigo adds that if private equity continues to grow in popularity, there is a risk that returns will start to decrease. He says that the industry is centred around finding the companies with the best potential and that there is a limit to the amount of these companies in existence.
Hedge funds still present in portfolios
Hedge funds have come under fire of late for poor performance, with private equity strategies growing in popularity.
However, Pictet is still prioritising hedge fund strategies and holds $9.7bn in AuM. Campiche says that although the hedge fund industry has received bad press of late, there are also hundreds of hedge fund managers. He says that where Pictet’s expertise lies is in picking the right ones. Pictet is invested in 95 hedge fund managers, with 81% allocated to offshore funds and 19% allocated to UCITS.
A recent report by Campden Research and UBS, The Global Family Office Report 2016, suggested that allocations towards private equity funds were increasing, at the expense of hedge fund allocations. However, Campiche suggests that allocations to hedge funds amongst Pictet clients have been consistent over the past the years, standing at approximately 16% in the average UHNW portfolio. He suggests that the increased allocation to private equity funds has come from a dip in allocations to fixed income securities. Campiche adds that regulation is limiting the maximum allocation to hedge funds in a portfolio, and that currently, Pictet is at the maximum level allowed. Campiche adds that Pictet is on the look out for new ways to increase the allocation to hedge funds.