Private Corner designs investment solutions conceived to convey, under the most favourable conditions, the quality of the underlying funds.
A New Reading of Value Creation
The logic underpinning Value for Money cannot be reduced to a quest for the cheapest product available. Rather, it seeks to assess whether the costs and fees borne by the investor are justified in light of the characteristics, the services and the value conferred by the product. For many years, the quality of a financial product was assessed principally against three criteria: its track record, its risk profile and its level of fees.
Analysis now extends well beyond a mere comparison of performance, risk and fees, to encompass the services associated with the product, the quality of the information furnished to investors, its governance and its functioning throughout its lifetime. In other words, the quality of the selected fund remains essential, but it must henceforth be assessed jointly with the conditions under which the investor gains access to it.
“The value of a product does not depend solely on the quality of the underlying assets, but also on the manner in which those assets are selected, structured, administered and monitored throughout their life cycle.”
A Particular Concern for Firms Serving Private Wealth Clients
This new approach concerns the private markets industry as a whole, yet it assumes a particular significance for asset management firms specialising in solutions intended for private investors. Indeed, such investors seldom enjoy direct access to major private equity, private debt or infrastructure funds. They generally invest through feeder funds, funds of funds or other vehicles designed to satisfy regulatory, fiscal and operational constraints.
These vehicles introduce an additional layer of intermediation between the underlying fund and the end investor. Until now, this intermediation has been assessed chiefly from the standpoint of access to the finest funds. With the emergence of Value for Money requirements, the analysis therefore bears not only on the quality of the strategies to which these vehicles provide access, but equally on the services they render and their cost to the end investor.
Discuss the architecture of the solutions offered to your clients with the Private Corner team.
Structuring: A New Lever of Value Creation
This is arguably the most striking development. A feeder fund or fund of funds is by no means a mere legal wrapper. Its structuring entails a series of strategic choices that determine the conditions under which the end investor accesses and holds the investment.
The Key Trade-offs in Structuring
- Calibration of commitments: the manner in which commitments made to underlying funds are calibrated against commitments received into the feeder or fund of funds has a direct bearing on the vehicle's net performance.
- Capital calls: the organisation of capital calls so as to limit dormant cash.
- Cash and liquidity management: the management of the vehicle's cash position and, where applicable, its liquidity.
- Monitoring of the underlying fund: the ongoing monitoring of the underlying fund or funds and their principal indicators throughout the life of the investment.
- Distribution of proceeds: the efficient return of distributions to investors.
- Fee architecture: the construction of a transparent fee structure that avoids the stacking of commissions.
- Alignment of interests: the alignment of interests between the vehicle and the underlying fund.
- Reporting: the production of reporting that is genuinely useful to financial advisers.
- Operational simplification: the simplification of subscription, monitoring and valuation processes.
These choices do not alter the intrinsic quality of the underlying fund or funds. They may, however, have a bearing on the costs borne by the investor, the operational efficiency of the vehicle and, in certain instances, the net return on the investment.
Two Solutions, One Underlying Fund
The consequence is this: two asset management firms may offer access to the very same institutional fund through investment solutions that differ markedly in terms of cost, functioning, services and investor experience.
An Asset Management Profession in Transition
The opening of private markets to private wealth clients has given rise to a new area of expertise. While selection remains the foundation of value creation, it now forms part of a broader undertaking: that of designing investment solutions capable of conveying, under the most favourable conditions, the qualities of the underlying fund.
Value for Money enshrines this development. It serves as a reminder that the value of a product depends not solely on the quality of the underlying assets, but also on the manner in which those assets are selected, structured, administered and monitored throughout their life cycle.
Conclusion
As private markets continue to develop among private wealth clients, access to major funds no longer constitutes, in itself, a differentiating factor. Manager selection remains central, yet the quality of structuring, the mastery of costs, operational efficiency and the calibre of ongoing monitoring have become equally decisive elements in assessing the solution offered to the investor. Past performance is not indicative of future results, and investment in unlisted assets entails a risk of capital loss as well as a liquidity risk.
