Private wealth and private markets: New relationships and new opportunities

Getting ready for his upcoming panel appearance at SuperReturn North America, Darrell Crate, Founder and Managing Principal of Easterly Asset Management, reflects on the topic that everyone’s talking about: Attracting private wealth into private markets.

How is the retail market evolving and growing when it comes to investing in private markets?

Nearly 75% of private wealth investors plan to increase their private markets allocation this year, according to Hamilton Lane. This aligns with the significant industry shift we’ve been experiencing. More and more private wealth investors are looking to private markets—and if the pattern continues, it’s predicted that private markets will more than double the growth rate of public assets, according to Bain & Company.

The capital and interest is there. The question is, how do private markets firms efficiently access it?

The democratization of privatized funds is the next frontier for private markets. Fund managers are looking for the best way to engage individual investors, and individual investors are looking for the best way to access private markets. There’s a demand and there’s a supply—now it’s time to connect the two.

What should retail investors look for when assessing private markets opportunities?

As retail investors start to think about their portfolios and their wealth creation objectives in a more sophisticated way, there must be a focus on four key pieces. One is building a portfolio of assets that increases the efficiency frontier of their return outcomes. The other is the actual cash income that the portfolio generates. Then it’s about elevating the return and reducing the risk.

When analyzing private market opportunities, investors should consider Distributed to Paid-In Capital (DPI). They should ask themselves, “Are these opportunities going to increase the efficiency frontier of the potential outcomes on my investment portfolio?” Then, they need to ask, “Am I getting the appropriate return for the illiquidity budget that I’m allocating?” If they do it right, they should be receiving better compound return over time for the illiquidity that they're assuming.

They should consider their liquidity and illiquidity budget allocation within the same mindset as endowments and institutions. But, that means thinking about those allocations in a much more complex way while taking into account the realities of being an individual, not an institution. That’s why it’s so important for individual investors to work closely with experienced asset managers and financial advisors who can help them navigate this complex environment.

What is your advice to private wealth investors, or financial advisors who represent them, on how to break into this market?

My first thought regarding this question is simple, and somewhat obvious to savvy investors: Do your homework. Make sure you’re seeking out trusted investment firms with trusted products. But to go a step further, investors should build a relationship with the firm. Get to know who they are. Gain exposure to their people to understand the values of the firm and what’s driving their desire to do well.

What private sectors should a retail advisor focus on when building their portfolio?

We believe a private real estate allocation is important. If you’re a financial advisor, you can help eliminate volatility for your client and get some of the very best talent managing your money. Real estate has proven again and again to be an integral part of an optimized portfolio.

Then, when thinking about the acceleration of your portfolio, look at the sectors that are growing in the economy. Those can include tech-related, lower middle market and small cap companies that are much better positioned for growth.

Also, find hard- and real-asset companies. Uncorrelated to the overall market, these sectors can be a nice complement to a portfolio of liquid securities.

How can asset management firms foster successful relationships between private markets firms and private wealth investors?

It’s all about access. Private markets firms are used to engaging with an institutional audience—it’s comfortable, it’s familiar. But right now, opportunity lies in the unknown. So, having a partner who knows the private wealth sector—how to navigate it, who to contact, and the key points of interest—is crucial.

It’s also about curating the right set of products, building the right connections, and fostering strong partnerships. To help private markets firms reach private wealth investors, asset management firms must offer products and services that can enhance return, reduce duration and risk, deliver strong income per unit of risk, and remain uncorrelated while pushing out the efficiency of the frontier.

At Easterly, with our carefully curated list of partners and solutions, we aim to do just that. Our goal is to enhance return and remain focused on the cash income that comes from that return. We consistently strive to reduce risk in a portfolio and increase the probability of higher return outcomes—all in the pursuit of our mission to make portfolios better.

Darrell is the Founder and Managing Principal at Easterly Asset Management, home to investment teams that provide institutional and private wealth investors with a portfolio of curated solutions across alternatives, active equity and active fixed income. Darrell also serves as the CEO of Easterly Government Properties, Inc., a NYSE-listed company which he co-founded in 2015.

Prior to founding Easterly, he served as the Chief Financial Officer of Affiliated Managers Group, Inc., a publicly traded asset management holding company which grew through acquisition. Darrell is also a Trustee Emeritus of Bates College, where he served for 18 years. Darrell earned his B.A. from Bates College and his M.B.A. from Columbia Business School.