The 60/40 stock and bond mix has long been the industry stan- dard for individual investorportfolios. But it may not be the risk/return profile that cemented its legacy.And it could change as access to newinvestment areas improves.
Large minimums, complex tax reporting, liquidity constraints and longer timehorizons combined to prevent many highnet worth and mass affluent investors fromgaining access to the private markets andother alternative asset classes. This leftindividuals and their advisors little choicethan to optimize a portfolio with the equityand bond strategies available to them.
However, new fund structures aredemocratizing private markets. As they do,high net worth portfolios could look a lotmore like those of institutional investors.
THE INSTITUTIONAL PORTFOLIO
Private market investments have longbeen a staple of institutional portfolios.Pensions and endowments, generally,have private markets allocations of 10%–20%, according to the McKinsey GlobalPrivate Markets Review 2021
It’s hard to argue their decision. Ourresearch found that private equity and private credit have outperformed global public equity and credit markets respectively19 of the last 20 years. They’ve also offeredinstitutional investors diversification benefits and access to a much larger investableuniverse than public markets, where thenumber of publicly listed companies hasfallen by more than 30% over the last 20years, according to research by ProfessorJay R. Ritter of the University of Florida.
Given some of these potential benefits,individuals may want to take a page fromthe institutional investors’ playbook.
In recent years, private market managers have sought to address some ofthe structural barriers that preventedaffluent clients from accessing the assetclass. A new fund structure — oftencalled an evergreen fund — takes aim atseveral of the impediments. Each fundhas its own nuances, but some of theissues that evergreen structures seek toaddress include:
Investment minimums: Historically,the minimums for a private equity partnerships were around $5 to $10 million,probably one of the biggest impediments to this investment. Evergreenfunds offer a lower entry point, typically ranging from $50,000 to $100,000,depending on the fund.
Improved Liquidity: Long lockup
periods also have been prohibitive to indi-
vidual investors. Traditional private equity
partnerships include a 10-12 year com-
mitment. Evergreen funds, however, offer
monthly or quarterly redemptions. To be
clear, individuals shouldn’t approach pri-
vate markets with a short time horizon in
mind. Private asset investing owes some of
its success to realizing value creation over
several years, not months. But a vehicle
that allows greater liquidity should never-
theless remove a hurdle for an individual
who isn’t investing in perpetuity the way
an endowment or foundation might.
Immediate exposure: Another difference between evergreen funds andtraditional private partnerships is thatinvestors can subscribe into the evergreen fund on a monthly or periodic basis.Many of these funds offer new investorsa built-out and diverse pool of existingassets on day one. Investors not able todiversify into private assets, the quickdeployment into assets may be favorableto the traditional model, in which fundsare raised for one or two years, and capital is deployed over several more.
Tax complexity: Historically, individual investors had to file a K- 1 for theirinvestment in an illiquid private partnership. The cumbersome document didn’tnecessarily prevent private marketinvesting, but it likely didn’t encourage iteither. The lower minimums and liquidity of an evergreen fund allow individualsto report the investment with a simpler1099, which investors, accountants andadvisors may find preferable.
As advisors and their clients becomefamiliar with these new structures, don’tbe surprised to see more participating inthe asset class. The traditional 60/40 mixof high-net-worth portfolios may start tolook quite different going forward.
Drew Schardt is managing director ofHamilton Lane.
By Drew Schardt
Evergreen Funds Offer Institutional Access
to Individual Investors
Looking beyond a stock and bond mix, advisors have a new way for theirhigh net worth clients to access these private markets.