By Steven Brod, Miami, FL - 12/9/2019
Key Factors Financial Advisors Should Consider in a Private Equity Platform
Historically, private equity has been the domain of institutional investors due to the prohibitive minimums and the extensive resources required to source managers and manage a systematic, institutional long-term allocation policy.
As a result, access platforms have grown in popularity, bringing these investors the opportunity to invest in private equity with substantially reduced minimum commitments, typically on a one-fund-at-a-time basis.
However, leaning on an alternative investment platform goes well beyond access and lower minimums. Below are key factors financial advisors should consider when deciding which private equity platform to work with:
Alignment of Interest
Investing in private equity is a long-term journey, and therefore understanding the ownership of the platform is key, as you will be working with this team through time. If the partners of the platform are co-investing alongside their clients, it's a good sign of their commitment to this journey.
Conflict-free institutional manager selection
Be sure the fund managers on the platform have proven track records over multiple market cycles, disciplined underwriting combined with the ability to add value to portfolio companies, deep teams and continuity in key personnel, and independent institutional independent safeguards. Confirm there are no economic arrangements between the private equity platform provider and the fund managers available on the platform. Fund selection should be based on manager merit. Typically, best-in-class managers won't pay for distribution.
There are a variety of strategies available in private equity. Some being venture capital, growth equity, buyout and distressed. Each of these involves investing in a company at different stages of its life cycle in terms of its cash-flow generation abilities (see diagram). The private equity platform should offer a diverse selection of managers deploying different strategies so that your clients can invest in companies in different stages of their life cycle.
The element of timing certainly has an impact on the portfolios' outcomes. That is why diversification across vintage year — the year of inception of a partnership — is an important element of private equity investing. Macroeconomic conditions, asset pricing, capital market issues, and other trends can influence the success of a strategy initiated at a specific point in time. One important element of vintage year diversification is the disciplined, steady deployment of capital. Laddered consistently and periodically, a systematically designed private equity portfolio should produce a staggered series of consistent cash flows and liquidity events for an investor. Investors cannot time the market in private equity any better than in traditional investments, thus vintage diversification mitigates market risk.
Technology, Research & Presentation Tools
Advisors must be equipped with all the qualitative and quantitative tools required to navigate the complex alternative investment journey for their clients. Therefore, manager research, comparative analytics, consolidated reporting and client-facing deliverables should all be seamlessly integrated into the platform.
Streamlined Operational Workflow
The ongoing management of a diversified private equity portfolio requires the ongoing allocation of new capital to funds. These capital calls generally occur irregularly over the investment period of the funds. A single fund will typically generate a significant number of capital calls and distributions over its life. Therefore, advisors should look like platform which integrates capital calls, distributions and consolidated reporting.
Leveraging Crystal Capital Partners' platform enables advisors to intelligently expose their qualified purchaser clients to private equity in the same manner as the most sophisticated institutional investors. At Crystal, partner capital represents 8% of firm AuM, creating a unique sense of synergy based on direct alignment of interest. We are not compensated by any of the managers on the platform.
We are an experienced team of investing professionals working together for 25 years. Our solution is turn-key and includes technology, research, presentation tools, a streamlined operational workflow, and an institutional selection of managers across a variety of strategies and vintages — a complete package designed to help advisors achieve real and lasting results for their clients.