How wealth managers can maintain their edge within private markets 

By incorporating private equity, private debt and real assets into a diversified portfolio, as opposed to the traditional 60% equities / 40% bonds, wealth managers can potentially enhance portfolio resilience. This approach aims to achieve higher returns while offering protection against mark-to-market volatility and long-term inflation, while the allocation to each private market asset class can be tailored to align with an individual client's specific financial goals and circumstances. It is also important to adopt a total portfolio approach when integrating private markets, ensuring that exposures to both public and private markets are effectively managed.

The first step in building an effective private markets portfolio is to establish a well-balanced foundation. This begins with applying equal weight to target allocations across private equity, private debt, and real assets. This balanced approach aims to address three key objectives: seeking to maximize returns through private equity, income generation and safeguarding against potential downside with private debt, and protecting against long-term inflation with a diversified allocation to real estate and infrastructure.

Once this foundation is in place, the second step is to fine-tune the portfolio based on specific investment objectives and anticipated secular trends. If the primary goal is to maximize returns, the allocation to private equity can be increased. If income generation and downside protection is a priority, then the allocation to private debt can be enhanced, and if long-term inflation protection is a concern, then allocations to real estate and infrastructure can be increased.

The third step focuses on wealth planning considerations. For example, a client who already owns real estate may choose to prioritize private equity over real assets, while a client with a shorter-term time horizon and an income requirement may prefer a larger allocation to private debt. It’s recommended that any allocation considers a client’s total assets, financial and non-financial, such as their own business or real estate, when constructing a well-balanced and tailored asset allocation. 

By thoughtfully customizing an asset allocation strategy to meet each client's unique needs, wealth managers can seek to enhance alpha potential, expand investment opportunities, and potentially achieve improved diversification of returns.

We recommend that wealth managers develop a bespoke, multi-asset private markets program, which can be tailored to meet the unique objectives of their clients. A robust private markets program should address the complexities of capital calls, provide access to hard-to-reach deals and general partners (GPs) on favorable terms, while effectively managing the inherent operational complexities associated with private market investing. 

It should effectively support investor onboarding, reporting, and portfolio monitoring, and thorough manager due diligence is required to achieve a well-rounded blend of top-rated strategies diversified across various geographies, asset types, sectors, and vintage years.

To test our assertion quantitatively, we modelled the potential portfolio resilience benefits for wealth managers transitioning from a 60/40 portfolio to a 40/30/30 portfolio and found that client outcomes improved across each scenario tested.

Despite the clear benefits, providing access to a diversified, institutional-quality private markets portfolio has been challenging because traditional funds and operational structures designed for institutional investors are often unsuitable for wealth management clients. Solutions now exist that can help overcome this hurdle by improving access to private market capabilities and offering essential features such as operational and regulatory scalability, retail-friendly fund structures, cash-flow management, the digitalization of paperwork and client portals. 

Mercer has worked for and with wealth managers to help them find solutions that meet their business needs and effectively address manager sourcing and due diligence, manager access and portfolio construction, while leveraging scale to potentially help reduce manager fees.