As private equity becomes more accessible to individual investors, an important question is whether individuals will earn returns comparable to those of institutional investors. In theory, individuals should lag behind institutions because they have more limited access, less experience, and fewer resources to devote to selecting private funds. A recent academic study examining private equity returns, however, found that high-net-worth individuals (HNWIs) have achieved results similar to those of institutions. But the study also highlights a gap in investment performance between less affluent and more affluent HNWIs, with the latter earning higher returns. It further finds that advisory firms explain a large share of performance differences, suggesting that advisor experience, sourcing capabilities, and fund selection processes may be central to investor outcomes. When estimated advisor fees are factored in, the least affluent investors’ outperformance relative to public markets is largely or fully offset.
In their paper, “Democratizing Private Markets? Private Equity Performance of Individual Investors,” the authors, Balloch et al., examine advisor quality at the firm level and find that advisory firms with more private equity experience and stronger prior fund performance are associated with better future outcomes for their clients across the full wealth spectrum. They support this conclusion by showing that HNWIs, regardless of their relative wealth, who work with the same advisor achieve similar investment performance. They also show that advisor quality is not entirely dependent on client wealth, as about one-third of the wealthiest individuals work with advisors whose prior performance has been below the median.
Questions to Ask About Your Advisor’s Private Markets Capabilities
For individuals seeking access to private markets, the message is clear: due diligence starts with your advisor. For many investors, the issue is not whether to replace a long-standing advisor, but whether that advisor has the private markets experience needed to identify strong fund managers. A few practical questions can help:
- How much experience does the advisory firm have with private markets? How many years has it offered private funds to its clients, and how many funds has it distributed?
- Does the firm track the performance of funds it has offered to clients relative to industry benchmarks?
- Does the firm source from a broad funnel, and how does it select the funds it offers to clients? How deep is the team responsible for underwriting and monitoring funds?
- How many funds does the firm typically distribute annually, and do they span private equity, private credit, and real assets?
- What fee structure does the firm use, and what is the expected impact on portfolio returns at different levels of capital committed to private funds?
Whether an investor takes an active role in selecting private fund managers or largely delegates fund selection, their advisor plays an important role in helping them build a resilient portfolio. Investors should seek advisors with deep private market expertise, a demonstrated record of strong performance supported by robust diligence processes, and client-friendly fee structures.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.