In this episode of The Trusted Adviser Podcast, host Rob Pyne is joined by James Damicoucas and Tom Bernard from Frontier Advisers to explore the growing accessibility of private markets for financial advisers. They discuss the rise of evergreen funds, key investment structures, and how advisers can integrate private equity, private debt, unlisted property and infrastructure into client portfolios.

The conversation covers liquidity considerations, risk-return profiles, and essential due diligence steps for advisers looking to diversify beyond traditional asset classes.

Tune in for expert insights on navigating private markets and making informed investment decisions.

LISTEN

Apple Podcasts:

Podbean:

Spotify:

SHOW NOTES

Topics discussed

The Growing Accessibility of Private Markets

Private equity, private debt, and unlisted infrastructure are becoming more accessible to wealth management firms
The evolution of investment structures, such as evergreen and semi-liquid funds
How advancements in product availability allow advisors to incorporate private assets into client portfolios

Evergreen Funds and Liquidity Considerations

Differences between closed-end funds and evergreen (open-ended) funds
How liquidity mechanisms vary across private market funds (quarterly, monthly, or annual liquidity)
Understanding redemption gates and liquidity risks in stressed market conditions

How Advisors Can Integrate Private Markets into Client Portfolios

The role of Separately Managed Accounts (SMAs) and model portfolios
Tailoring private market exposure to different client segments (ultra-high net worth vs. broader clientele)
Evaluating fund structures and ensuring fit-for-purpose solutions for advisory firms

The Rising Demand for Private Market Exposure

The impact of COVID-19 and market dispersion on advisor interest in private assets
The shift from institutional dominance to broader wealth management adoption
The diversification benefits of private equity, private credit, and infrastructure investments

Evaluating Risk-Return Profiles in Private Markets

The misconception that private market investments are always lower risk due to valuation frequency
How advisors can assess true asset risk beyond surface-level volatility figures
Understanding illiquidity premiums and their role in enhancing long-term returns

Due Diligence and Key Considerations for Advisors

Essential steps before allocating client capital to private markets
Common pitfalls, including fee structures, manager experience, and fund liquidity mismatches
How advisors can leverage research and institutional expertise to navigate private markets successfully

Quotes

“If you’re new to private markets, don’t rush in. The complexity can be daunting, but taking the time to understand the structures and risks is crucial.” — James Damicoucas
“Good research is critical—headline fees and risk metrics can be misleading. Looking under the hood of private market investments is essential.” — Tom Bernard

Resources

Frontier Advisors Insight Paper: The Rise of Evergreen Funds and Private Market Trends

TRANSCRIPT

Welcome to The Trusted Adviser Podcast where you get a deep dive into the world of financial planning with industry leaders who shared their stories of winning and learning as they chartered their path to success. This podcast is for the curious, those of you that like to dig into the detail, if that sounds like you get ready to listen and learn.

Rob Pyne

Today, we’re joined by two expert investment professionals from Frontier Advisors that specialize in research and advice on investing in private market assets, James Damicoucas and Tom Bernard. James is a senior consultant working closely with small institutional clients, including wealth management advice businesses. Before joining Frontier, he worked at perpetual private and then Zenith Investment Partners, where his background includes portfolio construction and investment research. Tom also brings expertise and experience from his time at Zenith Investment Partners, where he specialized in asset allocation, manager research and portfolio construction. Tom’s focus at Frontier is on alternative and private market strategies. So, both James and Tom offer a real depth of experience in private asset markets. I’m really looking forward to sharing their insights in our episode today.

Welcome James Damicoucas and Tom Bernard to The Trusted Adviser podcast.

James Damicoucas

Thanks for having us, Rob. Really happy to be here. We’re big fans of what you do on The Trusted Adviser podcast, and we’ve got a great, interesting topic to speak through today.

Tom Bernard

Yeah. Thanks very much for having us, Rob. Look forward to chatting.

Rob Pyne

You have got a great topic to talk about today, so I’m really looking forward to this chat guys you know, in recent years, private asset markets, you know, including private equity, private debt, unlisted infrastructure, they’ve become increasingly accessible to a broader range of investors, beyond the large institutions such as superannuation funds. It’s advanced as the investment structures. It’s the rise of evergreen funds and greater product availability have made it a lot easier for advisers to incorporate private markets into portfolios for their clients. Before we get into some of that detail, though, can you give us an overview of Frontier’s background in advising clients on structuring and allocation to private markets in their portfolio?

James Damicoucas

Absolutely. Rob. So just to give a high-level view, Frontier Advisors is an institution that’s been providing investment advice predominantly to superannuation funds that dates back over three decades. More recently, we’ve expanded our client types to facilitate two various different groups, such as universities, endowments, but more importantly, to the podcast today, to financial advice groups as well, you’re absolutely spot on in saying that a lot of the vehicles a way to access private markets and some of those asset classes you mentioned, has been pretty challenging for advisers in the past, but more recently, we have seen some greater access points and availability for advisers to be able to access private markets in that though, we do think that it’s important to be well educated in this space. Have great partners that you work with, both from a fund manager perspective, but also from an investment adviser stance, because there are quite a few pitfalls in this area. As good as the merit is to allocate to private markets.

Tom Bernard

Yeah, to James’s point, it’s really that access, the access point to private markets, which we’ve seen evolve, and they’ve become a lot more accessible now for the smaller client types, such as wealth, if you compare to superannuation funds, who have been doing this for a long time, it’s really been for them via closed end funds, by direct investments, whereas the sort of theme and the trend for the smaller investor types has more been through open ended funds, and that really comes back to the constraints of advisers and other smaller client groups, and why those access points make a lot more sense for them.

Rob Pyne

So just to clarify that, guys, you say open ended funds, and what you mean by that is this terminology we hear, called Evergreen funds, because a closed end Fund is a capital raise, it has a limited life to that capital raise, and it’s closed off. And so that closed end fund is more traditional of private markets, but you’re now saying there’s an evolution here to Evergreen or open-ended funds, and that’s making the private asset markets more accessible to wealth management firms advised businesses and putting that allocation into their client portfolios.

Tom Bernard

Yeah, that’s correct. Rob, yeah. Certainly, you see a lot of terms out there. I mean, Evergreen, open ended semi liquid is another one that’s commonly used also. I mean, they’re all quite interchangeable, but again, it sort of comes back to the specific product that you’re looking at, and what that looks like. In a lot of cases, semi liquid or evergreen can mean quarterly liquidity, quarterly liquidity, so coming in and out of a fund on a quarterly basis, it can mean monthly liquidity, or it can even be sort of, you know, annual or less frequent than that. So, although there are different terms used, it really depends on which specific fund or product that you are looking at.

Rob Pyne

Okay

James Damicoucas

We do love different terms in our industry, Rob and it can make it hard for many to navigate unless you have good understanding of what they all mean. But that’s exactly it. You know? What we say to clients is there can be very different forms of allocation in terms of, if you go that, what we call closed ended, that Tom just described, you sort of build out that allocation over time. It doesn’t start from day one. As you mentioned, Rob, there’d be capital calls, meaning that the manager will ask you to put in licks of money at different points in time, because the opportunities arise. So, I think one of the misconceptions is that day one, you put in your application and you’re off to the races, and it’s far from that. Evergreens do provide a bit more of an access point that you do get deployment quicker, but it doesn’t mean that it’s immediate, and it doesn’t mean it’s not without its challenges as well.

Tom Bernard

The other thing we’ll probably raise here as well, and we’ll mention it throughout the podcast, is that, you know, semi liquid or open ended doesn’t mean that the liquidity is always there. Certainly, we do see, and have seen, in stress periods, there is potential for these strategies to become illiquid. So certainly, our stance, and I’m sure the stance of many others in the market, is that, you know, don’t treat these sort of access points as liquid strategies. You know, they’re illiquid, but there is some. Flexibility to sort of navigate through different market environments.

Rob Pyne

Okay, so can you elaborate, then a bit on how Frontier collaborates with advisory firms, particularly in structuring SMAs- separately managed accounts- model portfolios, or even bespoke research for portfolio build for advice firms that are looking to integrate private markets into their portfolios for clients.

James Damicoucas

Yeah, sounds good, Rob. I might kick off Tom and you can chime in with anything that you say, because I’ll probably get a bit more of a look in from the client side. So, starting off with the first point you mentioned, Rob around the SMAs. So, Frontier, through our partnership with context capital based in WA we do offer advice groups the ability to have SMAs. Now, as you likely know and your viewers likely know, Rob, it can be challenging to have even these evergreen and semi liquid structures within an SMA, the vehicle really does rely on its constituents to have daily pricing. Daily liquidity is where it tends to work best. The platforms are evolving and offering more ability to have less liquid solutions on within your SMA, it is a bit challenging at times, and especially where Tom mentioned, some of those redemption gates might be hit, and you can’t exactly even just rebalance, not liquidate your position in some of these evergreen structures, it can compromise the efficiency of how that SMA works. Nonetheless, we do have clients that are willing to have that type of exposure. Some have the preference to hold these evergreens or private markets exposures outside their SMA. We’re also agnostic. We don’t say to advisers that we work with that it’s SMA or nothing, we’re happy to port any of our capabilities research in this area to whatever that best fits the adviser and their client’s needs. So, we’ve seen some groups where we’ve spoken about them, with them doing a configuration of how their allocation to private markets might look. And that might just be in a model portfolio context. It might actually be for a small subset of their clients. They might think, look, these are great assets. I might only see them for my ultra-high net wealth clients. Let’s just do it for them. You know, smaller clients. I’m happy to move them into a daily liquid SMA,

Tom Bernard

yeah, yeah, certainly, from a Frontier perspective. I mean, we’ve had as a business, long standing coverage of these private market managers and capabilities for, you know, an extended period of time, obviously, to some of the points James made around, you know, diversifying our client base and working with a lot more of the smaller groups, such as wealth. It’s really around tailoring that advice and research for the smaller end of the market. And, you know, it’s really through those evergreen type structures, which we’ve said, which, you know, is a more suitable access point for those clients. And we think it really comes back to just understanding the needs of those, those sort of different clientele, and ultimately, you know, what product or what access point is well aligned to, you know their needs and requirements as a business.

Rob Pyne

Okay, so what do you think has driven this increased interest from financial advisers in private markets, and how has your firm Frontier adviser’s kind of been adapting to that increasing interest and trend to access private markets for their clients?

James Damicoucas

Yeah, good question Rob, I think probably the COVID and 2022, period really caused big dispersion between listed and private markets. And I wouldn’t just say the financial advice market, but I think a lot looked at it and thought, geez, I’d love to get my hands on that. You know, it’s quite differentiated. These assets aren’t marked daily to market. You know the so they have that naturally reduced volatility compared with listed markets, and at the end of the day, they serve a good purpose and role within a portfolio. It’s just been very challenging historically to gain access to these markets for financial advisers that we know some that have had allocations for a long time, but I think more broadly, it’s been accepted that, oh, look, it’s sort of for bigger institutions this type of allocation. But now, with a lot of managers providing solutions that are, you know, adviser friendly, platform friendly, it started to come into the minds of many financial planners. Look, could we have an allocation here, and what could that potentially look like in our portfolio?

Tom Bernard

Yeah, there’s obviously a lot of sort of talk out in the market, and people use the term democratisation of private markets for different groups. I mean, we think it really comes back to just providing more access to diversification. You know, whether that’s through private equity or private credit, unlisted infrastructure, these are all asset classes which smaller clientele haven’t been able to access historically. And although, to some of the points we mentioned around valuation, and you know, they’re not valued as frequently, you know there is, there is a strong case that these are diversifying their additive to portfolio outcomes. You know whether that’s. From the so-called illiquidity Premier, or it’s just really accessing new asset classes that you can’t get access to on liquid markets. You know, there really is an improvement to portfolio outcomes. So, we think there’s, there’s a lot of themes there as to why, you know, advisers and other clientele are looking at these asset classes that you know they haven’t you know in decades and years prior.

James Damicoucas

You also mentioned Rob about, sorry, about how our research has adapted to meet adviser needs as well. It’s a great point, because you know, historically, looking at what an institution values versus what a financial adviser might value is quite different. And to Tom’s earlier point, we’ve reviewed a lot of these private markets capabilities for many, many years. It’s not new to us, so we’ve known a lot of these managers, and which ones are very favourable on and which less so. The thing that you know has become more of a focus from a Frontier perspective is really reviewing that structure and access point and making sure that it’s fit for purpose for our clients, that’s where a lot of when we look at these semi liquid, Evergreen type structures, that becomes a big part of the due diligence process in making sure we’re comfortable, from a research perspective, with that access point. But then when it comes to my role as a consultant, putting it forward to some of my clients, making sure that their expectations are well said in terms of exactly what that access point will mean. The common anecdote I always use this Tom mentioned, you know, some of these funds have monthly liquidity, quarterly liquidity. It means you’ll get a price point and access point at those different frequencies. But one of the big pitfalls I’ve seen with clients is you hear that a fund is quarterly liquidity, and you think, great, my client can get their money back in three months time. So, you know, they might not have they’ve got a house that they’ve bought, and they’ve got 120 days’ notice to put down their deposit or settle their house. Great, I’ll get my money back. There’s a lot more to it than that. You know, there’s redemption gates, and that, to give context, is where too many investors have put forward redemptions. The manager actually has right of way to shut off those redemptions or delay them. There’s also the platform considerations as well, that if you’re accessing via one of the platforms, they have their own processes to send redemptions to the manager, and there can be further delays there. So, we always want to make sure that we’re managing client and adviser expectations when going into these markets,

Rob Pyne

Given that you’re serving really now institutional clients, and you’ve been doing that for many, many years, and now it’s increasingly financial advisers. How do advice firms’ wealth advisory businesses, how do they typically differ the approach that they take to investing in private market investments? How does that between the large institutions and now wealth management firms? What’s the what’s the differences between how they approach asset investing in private markets?

Tom Bernard

Good question. Do you want me to take that first James? I think, I think the key thing there is definitely the access points, quite different, as we sort of discussed earlier, certainly for the wealth groups and the smaller client types we see it’s, it’s really using those evergreen or semi liquid funds, is what we see as the most suitable access point for those client types, and that really comes back to the ease of access. For those investors, those vehicles can be much quicker to deploy. In a lot of cases, that can be instant deployment. And for new investors who haven’t yet gained exposure to private markets using these vehicles or access points, it’s a lot easier to build and maintain an allocation and really gain exposure to a diversified asset type, whereas if you go down that more traditional route of allocating to closed end funds, you don’t really get that broader diversification that you can through evergreen funds. You really need that internal expertise, in a lot of sense, to be able to manage all the different line items within, you know, whether it’s a private equity program or a, you know, a private credit program. We think if we sort of bring it back to the, ultimately, the needs of advice groups, they just need simple access to diversification in a lot of cases. So really, those access points, can provide that for those groups, whereas, on the contrary, you know, superannuation funds and larger institutional clients, they can get a lot more granular in terms of all the different line items that they’re allocating to and managing within their program.

James Damicoucas

Yeah, yeah, Tom’s absolutely spot on. Rob. You know, anecdotally, from some of the clients I’ve seen, it’s a new space to a lot of them, they might have heard of it, but the actual allocations near and I sort of use the phrase, it’s almost like a dip to toe in experience. It’s pretty hard to go in and put five or six options into an allocation like this. Really that simplifying it down. To one or two options and seeing how it goes. What’s the client experience has been very typically adopted by a lot of these groups. There’s even some managers that actually you can get not just diversification, as Tom mentions across different segments and sectors, but even across some of those different asset classes. So, you can have some options that are a one stop shop, and you can get bit of private equity, bit of unlisted infrastructure and property, bit of private credit, all in one. And that’s sometimes been a bit more accepted by a lot of these groups that are coming in for the first time. I might just want to say, okay, how does this experience go before they might want to go a bit more granular to Tom’s point, the larger institutions have down the road as they become more comfortable with these asset classes.

Tom Bernard

Yeah, and I think if we look back at the SAA’s- or the strategic asset allocation- for all our different client types, you know, our larger clients, such as Super are far more progressed in terms of this journey. They could be as large as 30 or 40% allocated to different private market segments across their entire sort of investment program. Back to just some of James’s points. You know, our smaller client types, such as wealth, could be, you know, at zero at this juncture, and looking to maybe only get to that five to 10% mark as that sort of first step in in their journey. So, it really does vary depending on depending on the investor and the client type.

Rob Pyne

How do you help advice firms assess the risk return profile of private asset markets, moving that into a portfolio at five or 10% obviously, it’s about that risk adjusted return, including that for diversification purposes. How do you help advice businesses just assess that risk return profile and compared to public markets, for example,

James Damicoucas

yeah, we always start Rob to be honest with any allocation of assessing what’s the role and purpose of the allocation in the overall portfolio and really linking that back to the client’s needs. So, it’s no different for our wealth financial advice clients in that we always want to say, what’s your purpose and intent of your portfolios and clients’ portfolios, and how does that marry up with an allocation to private markets, probably before even that risk return conversation. Rob But the first thing we want to do, as I alluded to earlier, was manage those expectations that we really don’t want advisers to think, oh, this is an illiquid market that now I can get liquidity to. It’s not the intent or purpose of the allocation. Tom made it the point quite eloquently earlier on; these are still liquid assets. There’s just a more favourable access point for clients that the real thesis we see for a lot of our financial advice clients in allocating to these markets, is, and especially the semi liquid evergreen space, you can actually get quite quick deployment and a highly diversified exposure that you don’t have to wait multiple years to deploy very slowly, and you don’t have to have 6, 7, 8, different funds line items in your portfolio to achieve that’s really what we say. As well as managing that conversation I touched on earlier around you’re not going to get redemptions in stress times as quickly as the pricing might indicate, and other things, even in the good times, can still delay that process once we’ve managed those expectations, it really becomes whereabouts. Do you want to sit on the risk spectrum? You know the different asset classes, even within each one, have areas sectors where there can be really high risk, high reward, punchy allocations. But then there’s others that might be more defensive, yield enhancing that are more suited to a client’s needs. So again, whenever we’re looking to allocate, we have different sub sectors within each of these asset classes, and we’ll marry that up with exactly what is aligned to the client’s objectives and purpose in terms of allocating to private markets.

Tom Bernard

Yeah, yeah, certainly on the face value when, when we research these funds, and I’m sure when a lot of advisers look at different performance profiles of these strategies, whether they’re private equity funds or infrastructure funds, you know, private credits the big one at the moment. You know the every manager in the in the market now is a private credit manager, to some extent, but certainly on the face value, volatility looks a lot lower in these strategies, because back to our earlier point, the valuation frequency is very different to listed markets. So naturally you get a volatility profile that’s far lower. So, when you’re comparing evergreen private credit funds to traditional fixed interest strategies on a risk return basis, on the face value, they look far superior because volatility suppressed. But you know, when you when you do an underlying look through on the underlying assets, you know, you can actually have, you know, very similar, if not riskier, assets that seem sit within a, you know, a private credit strategy. For example. So certainly, from a from our perspective and from a research lens, it’s really looking through those headlines, headline figures to say, you know, what is the actual risk of the underlying assets here? And we ultimately think that’s the that’s the importance of research and researching all these different strategies. It’s to be able to identify, Okay, here’s the headline, performance, and risk metrics. But what’s actually happening under the hood here in terms of the actual risk of assets that that an adviser or an investor is getting exposure to?

Rob Pyne

Okay, so, let’s get specific. Then, guys, what’s the what are the typical building blocks or vehicles that are available to advisers they’re looking to gain exposure to private markets. How are they getting access? So, you talk about access points, give me some specifics as to how you’re seeing wealth management firms get access through investment vehicles to get access to the private markets that you guys help research and recommend.

Tom Bernard

Yeah, exactly I mean, I sort of sit within our research team. So, we do see all the activity here, and it’s been a big one. You know, there’s been a proliferation of strategies within, you know, this evergreen or monthly liquid type structure, which, which I think is quite prevalent here in the market, in terms of wealth clients gaining access to different segments of the private market universe. I’d say every, every fund manager we’re speaking to that, you know, is a has pedigree in private markets, many of which we’ve dealt at Frontier for a long standing period of time, in terms of their closed end and, you know, traditional private market type capabilities, many of them now are launching these evergreen structures because they’re trying to diversify their client base. And, you know, gain more traction with the melt the wealth market here in Australia. That’s also a trend that’s been happening offshore, in the US and in other markets for years. So by no means are we any sort of new trend here or an exception to what’s happening on a on the global scale, but certainly from a platform perspective, for wealth groups, the net wealths And the hubs, there’s, there’s now a, you know, a whole spectrum of capabilities that have been launched over the course of the last few years, and particularly in the last 12 months, to gain access to global strategies, whether it’s global private equity, global private debt, market direct lending, within that asset based lending, there’s various different strategy types that we are seeing now within those universes. But ultimately, that’s providing a lot of choice for advisers. We think so that’s ultimately a positive. I think that there’s more availability for advice groups to gain access to these markets. I just think it really comes back to; you know which ones are fit for purpose? You know which ones have been well researched? Which ones are we going to be aware of it in terms of how they’re likely to behave, and, you know, be able to provide liquidity in, you know, different market environments.

James Damicoucas

Okay, that, you know, not all advisers will want or need access to all the underlying private markets building blocks. You know, we might have an advice group or a client that really wants that income yield enhancement and, you know, protection from inflation, something like an infrastructure would probably suit them quite well. A lot of their cash flows are linked to CPI. They’ve got that protection, so they might not need some of those other asset classes within private markets. I think the illusion is that if you want to go to private markets, you’ve got to have a bit of everything. Whereas the reality is, each of those sub asset classes within private markets serves their own purpose and role, and each adviser will have their own needs. Some might have quite punchy portfolios with high return targets. The private equity is the way to go that space, and even you know, if they really wanted going down the path of the venture capital way, it really depends on each advisers needs, and that’s why it does start with their objectives and their purpose.

Rob Pyne

How does Frontier support financial advisers who are new to private markets, and they might have the same resources as the large institutional investors you’ve typically served.

James Damicoucas

Yeah, that’s probably where we think that we can offer a lot of support to financial advisers. Rob number one is, you know, we’ve got a quite deep private markets, same to which Tom belongs to that have covered these assets for a very long time and well versed in what to look for, what not to look for, in terms of these private market capabilities. So, we think that’s really important whenever anyone is looking at allocating to private markets, to have that due diligence backing people that have been there before, worn battle scars and seen when it hasn’t gone right, is really important to understanding and allocation. The other side is probably where we help support the financial advice community. Is our collateral and education materials. We think that it’s really important, not just for advisers, but for their end clients to understand exactly what they’re getting into so they can have the optimal investment experience. And part of that is making sure the communications and the education that we do is fit for purpose. So, Tom can take it away from here, he’s done some fantastic work in putting together a piece that looks at Evergreen markets and what to look out for, but really more importantly, what’s the sort of checklist that advisers can run through if they want to allocate to private markets, and what’s the questions they should be asking themselves and managers they may be looking to allocate towards?

Tom Bernard

Yeah, yeah, no, there’s some good, definitely some good points there. I mean, I think the research is a big one, and certainly within that, the inside pieces that we do produce from a Frontier lens. I mean, obviously, you know, evergreen and private markets is just one example. I mean, we cover this across, you know, every other asset class and every other challenge that, you know, we commonly hear is being experienced by our clients. But as it pertains to private markets, you know, we wrote a body of work late last year specifically on the Evergreen fund structures, and I guess, all the trends that we’d been observing there in terms of how that markets evolved. But then ultimately, what are some of the key points that you know a smaller client type, such as wealth should be looking at when you know a manager comes to visit them and is trying to offer them, you know, the new and latest solution within, you know, the private credit universe, say, for example. So, the way we think about it and how we like to help our clients, it’s really around, you know, some of those checklist points of what to look out for with, with these types of strategies. And some examples there are, you know, the structuring of those funds, how different funds get structured, and ultimately, you know how that can impact their return profile, but also how that can impact the liquidity profile of the strategy as well. You know what you don’t want to see is a mismatch between the investment horizon or the maturity of the underlying assets within a fund. Say, you know long term assets, seven-to-10-year horizon within a strategy, and then at the headline level, the funds offering monthly liquidity, say, but there’s no sort of liquidity mechanisms within the strategy to be able to manage that mismatch. So that’s a big component that we look at from a research perspective, and ultimately what we try to flesh out in terms of some of our research documents, some of our insights, piece is that you really have to look under the hood with this stuff to ensure that what’s being marketed and what’s been structured is ultimately in line with what assets you’re gaining access to, because Ultimately there is potential for these funds to lock up and gate during stress periods. And ultimately, you know, those mechanisms are there to protect investors, because, you know, as you know, like we can experience events like COVID and the GFC, and managers don’t want to be left having to sell good assets at significant discounts to their net asset value. You know, the mechanisms are really there for those managers to be able to weather through those, weather through those, you know, the short-term volatility in markets, and then ultimately, you know, provide a product for clients that’s. That’s ultimately fit for purpose, I think.

Rob Pyne

Yeah. So, you’ve talked a bit about liquidity there, and that’s what everyone thinks about when thinking about private markets. What sort of liquidity do I have? James mentioned it earlier about just don’t go in with expectations of being able to quarterly redeem the funds. There are some real considerations there around how to get access to this return profile of private markets, but also recognising there’s some liquidity issues there to be thoughtful about before you enter into it. So how should advisers think about liquidity fees, performance metrics when looking at the private market universe? How do those things all interconnect?

Tom Bernard

Yeah, I can start off with that one. I think, to your question, Rob, one of the, one of the key points there is that we obviously stressed earlier, and we did in our paper as well, is that advisers and clients should, should treat these semi liquid strategies as a liquid albeit, there is, you know, a potential there for greater flexibility. So, I think that’s, that’s the overarching comment we want to make there. But the liquidity mechanisms that we do see with different strategies can vary far and wide. You know, certain strategies can have a dedicated allocation to liquid assets within their vehicle. Typically, we see this up to a range of 10 to 20% so for example, if an adviser is accessing a private equity strategy for global private equity, there could be 10 to 20% of that portfolio is actually cash and short term credit, potentially some liquid or listed assets in there to help that manager navigate the inflows and outflows out of those out of those funds, a lot of them do outline in their PDS documents as well that they are structured to be able to pay about 5% of redemptions per quarter. So that kind of aligns with the, you know, 20% liquidity that they can potentially provide on an annual basis. So ultimately, there is some flexibility there on the liquidity side, certainly the fees element of your question as well. It’s something that you know, fees in private markets is a lot less transparent than it is in in the public markets, and that’s where we think again, the research is quite important for us and others to look, look through and look under the headline figure and say, you know, where are managers actually getting paid? Here, is it only on the headline fee? Is it performance fees or, you know, carried interest, or are there underlying, you know, deal or asset level fees as well that the managers are, you know, getting paid or retaining as part of, you know, as part of their process. So, there’s ultimately, you know, a lot of levels to it, in terms of what we look at from, you know, a research perspective.

James Damicoucas

It’s a common pitfall that one as well, Rob we know in the advice space, RG 97 fee disclosure is really, really important, and what their clients are going to see with some of these new options coming to market, and maybe the capability or the offshore vehicle, had existed for a long time, but the Australian fund has just been recently accepted. Sometimes those fees can get masked, and it’s only a few years down the road you really start to see those performance fees rise to the surface. And you know, some advisers and clients can be a bit shell shocked at the RG 97 fees being disclosed down the road. So especially if you’re going into some of those vehicles in their early days, it’s really important to understand exactly what the performance fees look like from an adviser’s perspective, so you don’t get shocked later on down the road and think, Is this fit for purpose? Is this outside my client’s fee budget now,

Rob Pyne

hence the need for good research and people that know what they’re doing when allocating so I had that paper you’re referring to there Tom as well the paper you prepared into the show notes and share that for our listeners, and it speaks to the rise of evergreen funds and how that universe is changing in Private Markets. So should advisers expect to trade off expected returns for the improved liquidity when compared to traditional closed end funds, because we’ve got a friend of mine who does quite a bit of private market investing directly for his clients, very high net worth clients, and my impression and interpretation of what he was telling me was that, you know, the liquidity, or the lack of liquidity, is what, in fact, helps drive the return differential between public markets. So, can you talk to me a bit about that point?

Tom Bernard

Yeah, of course, I’m sure your friend, Rob. I’m sure your friend’s a very savvy investor, Rob, but yeah, it’s a great question, because certainly this is something that we fleshed out in the paper. And, you know, I think there is a bit of a myth or a perception out there that the returns in open ended or semi liquid or evergreen funds, that all those catch all phrases are worse than what’s traditionally experienced in the closed end structures. But our sort of stance is. Really comes back to the specific manager or strategy that’s being looked at. And, you know, really having a good look at, you know, how those are being managed. Because ultimately, the performance metrics that get used for closed end funds relative to Evergreen is different as well. So, it’s not really a like for like comparison, but some of the key points we spoke about in the paper and tried to flesh out is ultimately what can drive different return outcomes between those two different approaches. It’s ultimately the liquidity differentials, the fees, and the compounding of returns element as well, which is, you know, a good feature of open-ended funds, where, you know, managers redeploy into new assets. And you know, there’s a continual sort of compounding of returns relative to the closed end structure, where you where you’re invested for a set period of time, and then ultimately get your money back at the end of that phase. So ultimately, they can all have impacts at varying degrees on return differentials. I think many would say that by nature of evergreen funds having liquidity sleeves, or, you know, a higher cash allocation within them, as is a drag on returns and that’s definitely true when you when you think about it on that basis. But I think what’s not captured there is the fact that on the closed end side, that liquidity is held outside of that allocation to private markets. So, it’s not necessarily capturing, you know, a higher allocation to cash, or, you know, fixed income or equities outside of your private markets allocations to ultimately come to a more like for like comparison, I think in terms of returns.

James Damicoucas

The other point there I’d make rob from a client side; is we get this a lot. Yeah, are you sacrificing returns by getting a bit more liquidity compared with the traditional closed ended vehicles? And I think Tom’s well summarised it there, but for me, it just comes back to managing expectations and understanding what’s the liquidity mechanism, and are you comfortable with that as an allocation? So, if you’ve got a private markets option that has 10% allocation to very short, dated investment grade credit that’s highly liquid, just understand that that’s going to have a different long term expected return, likely lower than private markets, but perhaps in shorter term periods, maybe not. It actually might do better in a stressed period. Just understand that differential, and there’s no real right or wrong answer if you, as an investor adviser, are comfortable with that allocation and it serves a need that you’d rather have that sleeve so then you’re not locked into a seven year investment, and you can get out down the road, or you can deploy quicker that might be highly suitable, albeit the return profile will be slightly different to a more pure, traditional private markets allocation,

Rob Pyne

for sure. So, guys, there’s a fair bit for people to chew on here. So, what are the critical due diligence steps an adviser should take before they begin thinking about allocating client portfolios to private markets?

Tom Bernard

Yeah, I think the first point of call, Rob, if advisers are new to private markets and they’re considering an allocation, I think the first point of call should be whether, you know, allocating to these asset types makes sense for their underlying clients. What we found, and certainly in our past roles working with advice groups as well, is that a lot of the underlying clients are a lot smaller in size. They might be, you know, at a certain age demographic, where they don’t have such a long term horizon to invest, where, ultimately, private market assets make a lot more sense like and naturally, that’s why superannuation funds have been so heavily invested there, because they’ve got such long horizons, they don’t have any requirement to liquidate portfolios through certain periods in the same way that mom and dad investors need. So, I think ultimately that’s the first point of call is, do these assets in terms of their longer-term return and maturity profiles, make sense for the underlying clientele? And then ultimately, if that’s a yes, you know what, access points, then make sense for that. And that’s where we come back to the whole sort of discussion around evergreen fund structures, where, for a lot of those clientele, you know, it might only make sense to have, you know, one or two allocations to private markets as a sort of holistic universe, perhaps one, one manager that manages a diversified exposure to private equity, another one for sort of private credit, say, and potentially in infrastructure or property as well, and that might complete their program. And on the face value, might look a lot more simplistic, but ultimately, if they select the right funds. The right access points, they can really get exposure to a really diversified and broad universe of assets. I think the thing we don’t want to see out in the market with advice groups is allocating maybe only to one or two private market strategies. And there, there are specific sector, they’re a specific thematic, and you’re really not getting that diversified exposure to different asset types, because ultimately, some of those segments can be quite cyclical, and ultimately, you know, in a stressed period, they’re far more likely to, you know, create challenges in terms of lock ups and gazing relative to those where you’re really getting a diversified exposure to a, you know, a broad universe of assets.

James Damicoucas

I think Tom summarised that quite nicely, Rob, but just to go expand up on that a little bit more and go a bit more specific, you know, I love hearing, and I think a lot of clients do too some of the war stories of managers. You know, I’m not a pessimistic person, but you know, you can get some great insights out of some of those stories. I think when it comes to private markets, some managers think going, we’ve never had a default in private credit for two decades plus, like, sometimes makes me a bit nervous, if I’m being perfectly honest, because you just think, well, everyone’s going to have that moment at some point in time, or where things don’t work out. Are you well-resourced to be able to deal with that? And what has it been? I heard a great saying, which was, you know, when you’re looking for a manager in this space, look for one with some battle scars, because if they don’t have them, they might end up on yourself. So, I think that I think that really holds true, to be honest, because you just want to be sure that you’ve seen how they’ve coped with them and all they might not all be positive, but I’ve heard some great default stories out of managers where they’ve really been able to turn it around and show their expertise and resources put to good use.

Tom Bernard

Yeah, just to add some colour there as well, I think what we really look for in terms of managers, and ultimately, we think advice groups should be looking at as well, is, you know, which are the ones with the experience managing these semi liquid or evergreens through stressed periods in the past, you know, whether that’s COVID or GFC or through other periods. It’s really, you know, who’s had that operational expertise and skill set to be able to facilitate that sort of level of inflows and outflows that that pretty much, you know, the product says on, on, on, on the label and on the tin. What we what we do see a bit as well as managers who’ve only ever managed in closed end for institutional type clients wanting to get in on this sort of trade in terms of, you know, gaining, you know, gaining traction with the wealth market. But they don’t have that internal pedigree and experience in managing evergreen through stress periods, being able to facilitate a degree of, you know, redemptions, as is outlined in terms of the product. And then ultimately, you know, manage, manage the liquidity most efficiently in the strategy, to ultimately, not, not be a detriment to the return profile, right? Because what we do see is, you know, managers can have a fantastic capability, but maybe they get the product structuring wrong, and you know that ultimately will then have a greater impact on, you know, a detriment to returns relative to, you know, how proficient they might be in, you know, only managing closed end vintages. So, there are a lot of layers we think to sort of for advisers to explore there and that’s where we think the research on these different strategies is just so important terms of uncovering all those, all those key points.

Rob Pyne

Clearly, you both and Frontier Advisors have a lot of experience in this space and managing and supporting clients, advising them on how to get access to markets, but doing the research before they get to the point of allocating client wealth to these markets. How do people in the wealth management space find the Frontier Advisors? What do they just reach out? Who do they contact? How do they get support that you can provide to help them make sure they make the right decision for their clients, which obviously is a it’s a big decision for advice firms. They don’t want to be putting clients in a position of real, great risk for both the client and themselves as advisers. So how do they get access to you guys to help them make that right decision for allocating private markets into their portfolios.

James Damicoucas

Yeah, absolutely. That really probably falls a lot to my team. You know that covers wealth in the financial advice space. Rob, you know, we’re always happy to talk to lots of different practices about their needs, not even specific to private markets. It can be anything that’s topical for them, their businesses, their pain points with their clients, and how we might be able to bring a lot of our capabilities and support to advise them and allow them to meet their needs, but specifically to private markets. I think it’s about, you know, first having that engagement, interaction, understanding their business, allowing us to speak about Frontier and our capabilities, much like we have in the podcast today, and see. Is there an opportunity to work together, provide them that support, to give them the confidence to allocate to something like private markets? And you know that can be a multi-step process. It can start off with talking with consultants like myself that have allocated to the space and have many client examples where we’ve built our programs for the various different private markets, allocations, the things to think about, how to structure them. And then it might get as granular as talking to representatives such as Tom and getting in front of them of exactly we’ve spoken about today. What are the key things you look for when you’re assessing individual managers in this space? And you know, what research have you had? I’ve heard about this manager. What do you think of them? Do you have any key points? What should I look out for? And that’s really what develops that trust and confidence to be able to allocate to the space I think,

Rob Pyne

Guys, there’s a lot here for our listeners to think about private markets is a, it really, is an emerging opportunity for advice firms to allocate to a part of the market that really hasn’t been, as you say, accessible, typically, to wealth management firms historically, and you’ve been really serving institutional clients for many, many years. Really appreciate your time today, sharing a lot about the part of the market that is a that does provide that premium, typically, historically, to public market access so James Damicoucas, Tom Bernard, thanks so much for joining us today on The Trusted Adviser podcast.

James Damicoucas

Thanks very much for having us.

Tom Bernard

Rob- yeah really enjoyed the chat.

James Damicoucas

Yeah, great dialogue and really good stuff to be able to bring some of our insights to the broader financial advice market. If there’s anything we’d leave listeners with is don’t feel the need to rush into this space, it can be quite complex, daunting, but ourselves are always there to support any advisers that want to have a chat about this space.

Rob Pyne

Great stuff. Guys. Thanks again. Appreciate it.

James Damicoucas

Thanks again. Rob,

Tom Bernard

thank you. Bye.