There is a weak link in the wealth management chain when it comes to giving investors access into private markets: the distribution channel. However well-structured certain funds and wrappers are, if wealth platforms cannot easily adapt and hold them, they won’t get distributed.

Making private market or “alternative” investing more accessible – or “democratic” – is all the rage, with structures such as Europe’s ELTIFs and the UK’s Long Term Asset Fund (LTAFs) in the mix. In the US, President Donald Trump has loosened rules on 401(k) retirement accounts so that holders can invest in this area. 

As with all such changes, there are growing pains – for example, this happened when several private credit funds were hit earlier this year by client redemptions. 

An issue, however, is what could be called the mechanics of the wealth management market. The industry might spend time and energy creating all manner of funds and “wrappers” with their colourful terms, such as “evergreens.” However, unless the industry provides investments efficiently to the end-user, none of this hard work will bear fruit. 

To illustrate the point, data shows that LTAFs have yet to achieve meaningful traction on wealth platforms – there are about 40 of them with a combined AuM of £7.3 billion ($9.83 billion). This is small change in today’s asset management world. LTAFs are a new category of UK open-ended funds. LTAFs can, since April this year, be held in a stocks and shares ISA and Junior ISA, a form of retail savings wrapper. LTAFs can also be held in Self Invested Personal Pensions (SIPPs).

There is progress, but for Tom Douie (pictured below), founder and CEO of Private Markets Alpha, or PM Alpha, the pace is still too slow.

Tom Douie

Douie argues that the asset management sector gives more priority to creating fund wrappers than it does to how these entities are distributed. Listed investment trusts can be a route to private markets, but at the cost of a large share price discount to net asset value. LTAFs have been designed to address these kinds of problems, but there’s a catch. Today’s wealth platforms aren’t set up to accommodate LTAFs at scale, Douie argues.

A way through
Douie argues that there is a way forward: Exchange-Traded Notes, or ETNs. They are securities – so they are compatible with wealth platforms’ existing infrastructure, and they can be structured to capture private market exposure. Douie sees ETNs as being the key missing part of the puzzle.

“The point [for wealth platforms] is to have the option [of entities such as ETNs] available, so that if you get the demand, you can respond to it. It is building a bridge between business and the people who ultimately consume it,” he told WealthBriefing in a call. To ask ‘what sort of fund do we need?’ is the wrong question.”

ETNs, he said, can be held in custody accounts, processed through standard trading workflows, and reported alongside public market holdings such as equities and bonds, without the need for advisors to build separate systems with unfamiliar terminology.

Douie said the wealth sector should focus on identifying the operational constraints in distributing an investment.

PM Alpha has partnered with Barings, which has raised more than $500 million in assets from US offshore and Latin American wealth markets through PM Alpha's ETN programme.  

Private banks already have experience in using ETNs, Douie said, so this is a tried and tested area. 

“You can build it [the ETN] like a fund and have it operate like a security,” he said. (Not all ETNs are built like funds, he said.) At PM Alpha, the ETNs are operated as Dublin-based special purpose vehicles (SPVs), which are governed by independent trustees, and custodied at the same global banks as funds.

Unlike exchange-traded funds, which hold a basket of physical assets, ETNs are, according to one online definition (Investopedia), a promise from the issuer to pay the investor the return of the tracked index at maturity (minus fees). As such, they’re a form of unsecured credit, although they can either be collateralised (such as the PM Alpha ETNs) or uncollateralised as Douie points out: “ETNs are flexible by design and can be set up to deliver the returns of the underlying investment, be that equity and or income. ‘Collaterisation’ means the ETN actually holds the underlying investments and the trustees ensure that returns due to its investors are passed on. In this way, there are many similarities with traditional fund structures. You just need to be deliberate in their construction and transparent in communication, recognising that you are introducing them to a wealth manager community that is predominantly fund buying.” 

Platforms rising
This publication also spoke to Douie back in 2022 when the PM Alpha business had introduced an online digital platform to widen access to private markets assets. Recent years have seen the ascent of firms such as Moonfare (Germany), iCapital (US), CAIS (US) and ADDX (Singapore). They use technology to challenge traditional bank-controlled access to private market investments. At a time when alternative investments have often offered superior yields to listed equities and government bonds, the space has expanded rapidly. Even this spring’s wobbles in the private credit space appear not to have unduly dampened enthusiasm, given the breadth and depth of private markets overall. 

However, these investments still tend to be open to mostly high net worth clients, large single-family and large institutions such as pension funds and insurers. Policymakers and regulators such as the UK’s Financial Conduct Authority are looking at ways to expand access in a risk-controlled way.

The distribution channel is crucial, and in the end, will decide whether the democratisation mantra remains an empty promise or a real deal, Douie added. “If you cannot buy it, what’s the point?”