The wealth management industry has had a paradigm change in the last few years driven by changing demographics, more and more millennials joining the investing wagon, and the current digitalisation of the sector.
These new generations of investors are not only shaped by a challenging investment environment, characterised by increased levels of uncertainty and a rising cost of risk for investors and wealth managers, where it is becoming increasingly difficult for advisors to generate superior investment performance for their clients. They are also aware that technological advances, regulatory changes, new business models and new competitive models are poised to disrupt the wealth management industry.
These disruptions have led institutional investors for some time to seek performance outside of the major publicly traded asset classes such as real estate, private equity, private debt and infrastructure, but also with digital assets.
A number of these alternative assets can be described as real or tangible, meaning that their valuation is directly linked to relatively illiquid physical assets, and therefore somewhat immune to the erratic fluctuations of the equity market and protecting against the potentially damaging effects of inflation.
Private equity is not totally new to individuals, but until now, they have accessed it primarily through so-called tax funds such as FIPs and FCPIs in France or SCPC in Switzerland, with strict investment constraints on company eligibility and the need to return the money within a relatively short period of time, at the risk of dissatisfying both the investor and the company.
While some aspects of investing are evolving, the general idea of clients is that they have money that they would like to invest for the long term, and that they may need to withdraw some of it at some point in the future - but not everything is thought of in terms of target pots. One of the areas in which outcome-based investing has gained prominence is ESG.
The idea that socially responsible investing (or ethical or green investing) is doing well, but probably won't get good returns - is outdated. We have moved to a situation where returns are roughly parallel, and in some cases, superior.
Research has also shown that private equity has limited correlation with public equities and therefore offers clear diversification benefits. In addition, due to the lack of a daily listing of private companies, perceived volatility is lower than that of publicly traded companies. While it is important to note that private equity is affected by many of the same risk factors as public companies, this illiquidity characteristic can be particularly valuable in times of severe market turbulence, when public market prices can plunge significantly and quickly, as we experienced in March 2020 due to the pandemic, for example.
Tomorrow, unlisted companies could conduct their capital transactions (fundraising, shareholder inflows and outflows) via blockchain, simplifying the current relatively cumbersome process.
The advantage of blockchain in this field would be to facilitate the raising of funds but also the exit of shareholders and the liquidity of their shares. Private equity investment would then be profoundly transformed. The same would be true for private debt financing and also in real estate where blockchain is particularly well suited.
As a result, wealth management offerings will change dramatically from the ordinary to more sophisticated products, and the industry will be able to rely on companion for professionals managing real assets like Smat to help traditional wealth advisory firms expand their capabilities and enhance digitalization more quickly and cost effectively.
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