Preqin, in its latest report on fundraising from private wealth investors, highlighted a growing trend of increasing allocations toward alternative investments. According to the global provider of financial data and analytics, as of 2023, global wealth experienced a 4.2% increase in US dollar terms, underscoring the resilience of capital pools even amid tempered growth in both developed and major emerging markets. This uptick marks a significant recovery from the previous year’s declines in global wealth per adult and wealth per adult in North America, although European wealth continued its slow but steady increase.
Preqin’s report, on Friday 23 August, concluded that despite the challenges of 2022--driven in part by the poor performance of traditional 60/40 portfolios--the renewed growth in 2023 indicates that private wealth remains a reliable source of capital for general partners.
Private wealth investors
The allocation to alternatives among private wealth investors varies significantly by the size of the investor. According to Preqin’s data, the average weighted allocation toward alternatives for private wealth investors, which includes both wealth managers and family offices across different regions, stood at 22.6%. However, the unweighted average allocation was markedly higher at 39.2%, a discrepancy of 16.6 percentage points. This higher unweighted average is primarily driven by single-family offices, which typically manage smaller assets under management than wealth managers.
When breaking down the wealth managers specifically, most cater to a broader spectrum of wealth levels compared to family offices, which tend to focus exclusively on ultra-high-net-worth individuals. The global wealth universe, which is set to undergo a significant generational wealth transfer, is estimated at approximately $100trn, while the AUM of all wealth managers tracked by Preqin amounts to $24.9trn.
Regional differences and allocation size
The size of wealth managers varies significantly across regions. In North America, Preqin’s sample includes a higher number of smaller managers compared to those in Europe and the Asia-Pacific (APAC) region. Specifically, 61.2% of the North American wealth managers in the sample manage under $500m in AUM, while in Europe and APAC, this figure is 32.2% and 32.9%, respectively. Interestingly, the increase in alternative allocations in North America has been largely driven by these smaller managers, particularly those with under $100m in AUM. Preqin’s report suggested that these smaller advisors, who would traditionally adhere to a 60/40 investment strategy, might now consider allocating up to 15% toward alternatives.
The size of the allocation also plays a crucial role in managing costs. Larger limited partners, with more substantial allocations, often demand fee discounts, which can be challenging for smaller managers to negotiate. The report cited two North American wealth managers, Jasper Ridge Partners and Edge Group Capital, to illustrate this point. Jasper Ridge Partners, with an AUM of $36bn, allocated approximately $21.6bn to alternatives, while Edge Group Capital, with an AUM six times smaller, allocated around $1.2bn. If both managers were to diversify their portfolios by investing in a minimum of 30 funds, Jasper Ridge’s average investment per fund would be $720m, compared to Edge Group’s $40m. This significant difference underscores the importance of scale in securing favourable fee arrangements.
Contrary to what might be expected, Preqin emphasised, the age of an institution does not appear to significantly influence the allocation toward alternative investments. The report, which included a sampling of wealth managers and family offices with AUM of at least $1bn, found that older institutions do not necessarily allocate more to alternatives. The rise in alternative assets, particularly their growing accessibility to retail investors, is a relatively recent phenomenon, and even newer managers have been able to build substantial exposures to these assets.
Asset class preferences
The current allocations by private wealth investors across alternative asset classes show a clear preference for private equity, including venture capital and real estate. According to Preqin’s sampling, the average weighted allocation to PE and VC was 11.9%, while real estate accounted for 5.7%. Other allocations included 4.0% toward hedge funds, 2.8% toward private debt and 1.6% toward infrastructure.
Hedge funds, in particular, have faced challenges, recording $217.3bn in outflows between 2014 and 2023. These difficulties were attributed to underperformance and a greater correlation with traditional 60/40 portfolios in the post-covid era. Additionally, the creation of new family offices by UHNWIs has allowed these investors to bypass hedge fund fees by establishing in-house investment teams.
European Investors
European private wealth investors have shown a marked preference for PE and VC, real estate and private debt. Preqin’s data on fund searches revealed that since 2020, PE and VC funds have consistently been the most sought-after asset classes among European wealth managers. In 2023, 70% of fund searches by European wealth managers were for PE and VC, a figure that has risen to 77% in 2024. Among European family offices, 65% of searches in 2023 were for PE and VC funds, with this figure increasing to 74% by July 2024. Real estate has been the second most popular asset class for European family offices since 2020.
As of the end of 2022, 30% of AUM in Europe came from retail investors, up from 29.5% in 2022. This share has been on an upward trajectory since 2018, particularly after the pandemic. The European Fund and Asset Management Association concluded in its 2023 Asset Management in Europe report that this increase was due to a strong rise in AUM managed for retail clients in 2021, followed by a smaller decline in 2022. For retail investors not invested with a wealth manager, structures that allow for lower minimums could facilitate access to alternative investments. Platforms like iCapital and Moonfare, which offer lower entry points and streamline the investment process, have become attractive options for these investors, particularly those without prior relationships with GPs or significant AUM to attract attention from larger GPs.
Private markets’ outlook
The ongoing development and growth of private markets, coupled with their recent outperformance, have not gone unnoticed by private wealth investors. Preqin’s report indicated that there is a strong likelihood of increased inflows into private markets in the coming years, especially from wealth managers. This trend has already begun in Europe, with a growing interest also observed in Asia-Pacific’s burgeoning population of high-net-worth individuals and advisors across North America. As the global wealth transfer looms, managers have an opportunity to build relationships with these investors, leveraging technology to reduce transaction costs and cater to an expanding investor base, Preqin concluded.