A high-net-worth mistake
By Paul Mackintosh - 12/11/12
Quite by chance a few days ago, I got some insight from a leading private wealth management professional in Asia on current attitudes among Asian high-net-worth (HNW) individuals towards investment in private equity and hedge funds. And for alternative asset managers, the news is not good. His choice of words was “huge aversion”, which he described as regrettable but understandable, partly because “the losses that the clients made, particularly in this region, to those two products and asset classes mean that many clients won’t even consider them.”
Regrettable partly because even this highly critical observer believes that there are still some good funds out there. In “what’s left of the hedge fund industry”, there are able managers still around. And private equity, the wealth manager feels, is enjoying a bit of a renaissance as it steps in to replace bank capital in many areas and applications, with the added attraction of being able to get return on investment quicker without the old seven-year lock-in structures. “There’s a tremendous opportunity for private equity firms to make terrific returns for clients and with more liquidity,” he maintained.
But unfortunately, just as these asset classes have new possibilities opened up to them, the investors are looking in the other direction. HNWs are not necessarily wiser for the experience: the same figure warns that they are investing in highly overpriced bond markets just because of market fashion, exactly as they did with alternatives, and could end up losing on that asset class as well. Yet they do know when they have been burned, and the wounds from before 2008 will take a long time to heal, it seems.
Some industry sceptics would point the blame at the intermediaries – the private banks and other wealth managers responsible for presenting these propositions to HNWs in the first place. But I’m afraid much of the blame must lie with the managers themselves. Fine, everyone was drunk on the Kool-Aid back in 2005-06, but GPs had just as much of a fiduciary duty then as now to represent the terms and risks of their vehicles fully and honestly, let alone the track records and relevant information. Some did not.
I remember being told by a disgruntled LP back in 2006 about the cavalier, offhand attitude of a certain major buyout firm inviting investors to come into its latest vehicle – without full disclosure of track record or enough time for due diligence. Take it or leave it, was the attitude. Is it any surprise that that same fund saw some of the worst value destruction from investments in the region after the crisis? If private equity GPs worry that many Asian HNWs won’t give them a hearing nowadays, they should start by looking in the mirror.