HNW investors embracing endowment-aligned strategies.
Australia’s high-net-worth (HNW) investors ($1m+ in investable assets) and ultra-high-net-worth investors ($10m+ investable assets) are increasingly looking beyond traditional bonds and equities with a notable pivot towards alternative investments such as private equity, private credit and structured products. This is indicative of an overall transition to HNW investment strategies increasingly aligned with the asset allocations implemented by institutional asset owners. And this shift is not just about returns; but a deliberate move towards diversified portfolios, sustainability, and preserving intergenerational legacies—a convergence that’s reshaping the landscape of modern wealth management.
Historically, leading endowment funds like those at Harvard and Yale Universities have favoured alternative assets advocating for diversified portfolios beyond traditional stocks and bonds. Unlike traditional portfolios, which often hinge on market fluctuations, an endowment-aligned strategy seeks consistent, predictable returns, shielding against volatility.
David Swensen, the former CIO for Yale University's endowment, pioneered an approach to portfolio management that championed this diversified approach, with sizeable allocations to alternative assets—real assets, private equity, and venture capital investments that have delivered superior returns while mitigating risk exposure. This approach has been adopted by endowments and foundations around the world. Their consistent outperformance of broader market indices has caught the attention of astute HNW investors seeking absolute returns and capital stability.
Increasing shift to alternatives
The Praemium/Investment Trends HNW Investor Survey 2023 showed that there was a 4% increase in HNW individuals allocating to alternative investments compared to the same survey in 2022. This supports similar recent analysis from research groups like PwC, Ernst and Young and McKinsey & Co. And the asset management industry has come to the market to meet this demand. Over a third of funds approved for access via the Praemium platform in 2023 were funds investing in alternative assets, with a large portion being private equity, private debt, and structured products.
This parallels the strategy of endowment funds, which have historically favoured alternatives such as private equity, real estate, and hedge funds for their diversification benefits and ability to outperform during market volatility. The relevance of private debt, private credit, and structured products in this landscape stems from their potential for enhanced yields and risk-adjusted returns against a backdrop of decade-high inflation. These investments strike an appealing balance between risk and reward, aligning perfectly with the objectives of HNW individuals seeking stability and growth in their portfolios.
Private debt and credit present compelling investment opportunities. In Australia, the private debt landscape has seen considerable growth, with investors tapping into opportunities within the real estate sector through mezzanine financing and direct lending to small and medium-sized enterprises (SMEs). The private credit market has expanded beyond traditional banking, fostering opportunities in peer-to-peer lending platforms and private credit funds catering to diverse sectors like healthcare, technology, and renewable energy.
Globally, similar trends emerge, with investors finding avenues in distressed debt, infrastructure financing, and venture debt. Traditional banks have reduced their exposure to lending because of regulatory changes, and private debt has grown significantly in the last 15 years to fill the void. In Europe and Asia, investors have been exploring direct lending to corporations and alternative financing solutions, contributing to the evolution of a robust and diversified private credit market.
Structured investments offer unique opportunities by providing tailored financial instruments that combine various assets with one or more derivative instruments to meet specific risk-return profiles. In Australia, structured investments have gained traction among investors seeking exposure to diverse asset classes such as equities, fixed income, and currencies, while allowing them some downside protection. These products offer the potential for enhanced returns and risk mitigation strategies, attracting interest from retail and institutional investors alike. Globally, the landscape for structured products encompasses a wide spectrum, including structured bonds, derivatives, and collateralised debt obligations, catering to varying investor preferences and risk appetites.
The appeal of structured products lies in their adaptability to market conditions, allowing investors to capitalise on specific themes or market movements while managing risk through structured payouts and embedded derivatives, fostering a dynamic avenue for investment diversification and customisation.
ESG and intergenerational wealth focus
The shift towards an endowment-inspired strategy isn't solely profit-driven; there's a notable emphasis on Environmental, Social, and Governance (ESG) principles. HNW investors are increasingly integrating ESG considerations into their investment decisions, much like endowments. They look for opportunities that promote environmental sustainability, social responsibility, and strong governance practices and recognise that companies with strong ESG practices might be better positioned for sustainable growth, which can positively impact their investment performance.
Intergenerational wealth preservation also stands as a cornerstone in this transition. Endowments are designed for perpetuity, focusing not just on immediate gains but also on the enduring transfer of wealth across generations. Both recognise the importance of strategic planning, tax considerations, estate planning, and, increasingly, the integration of sustainable and responsible investment practices to ensure the longevity of wealth across generations. In terms of intergenerational wealth transfer, the Family Wealth Report noted that high-net-worth families are increasingly focused on legacy planning and governance structures. This mirrors the institutional governance frameworks that endowment funds use to manage multi-generational wealth.
Adopting endowment-inspired investment strategies
The adoption of endowment-inspired investment strategies by HNW individuals signifies a nuanced approach to wealth management. Given their complexity, varied nature and higher entry thresholds, accessing these investment opportunities can be intricate without professional guidance. This is where wealth advisers play a vital role in facilitating access and inclusion as part of a broader risk-managed investment portfolio.
Wealth advisers will increasingly need access to a diverse range of alternative investments, ethical investment options and technology that can facilitate family wealth management and reporting. And only sophisticated investment platforms such as Praemium, which has been truly built to support and administer these complex assets, will be best placed to support this evolution in wealth management.