The private markets are expansive, with many investable strategies that can offer a range of potential benefits. Similarly robust is the population of asset managers bringing these opportunities to investors. Amidst established participants and the continuous influx of new entrants, distinguishing asset managers with comparable investment opportunities is of critical importance.
At first glance, the investment opportunities available across private asset managers may appear to be very similar. However, a closer look reveals a significant divergence in performance outcomes among funds with nearly identical mandates. What is causing this disparity? The strongest managers are not only experts in originating investments with outsized return potential, but also conducting extensive due diligence and actively managing their portfolios to navigate market cycles.
In the public markets where assets are efficiently priced, the performance variance between managers is relatively small, meaning the reward associated with manager skill is modest. In private markets where managers can take advantage of price dislocation and exert a degree of control over their investments, the gap in performance can be substantial. Illustrated below, the difference between the best and worst-performing managers is drastically wider in private markets. Advisors who are considering opportunities in alternatives for the first time may not know where to begin – this guide will help you ask the right questions as you evaluate potential partners.
1 Sources: Preqin, returns are for 2014 vintages that have last reported between 12/31/2022-12/31/2023. (North America, Closed funds): Private Equity (Buyout),
Private Credit (all Private Debt strategies); Private Real Estate (Co-invest, Core, Core+, Debt, Value Added, FoF); Morningstar, returns are over a ten-year period from
1/1/2014-12/31/2023 (Open-end funds): Public Equities (US Large Blend); Public Fixed Income (US Intermediate Core Bonds); Public Real Estate (US Real Estate). Past performance is not indicative of future results. There can be no assurance that historical trends will continue.
A manager’s reputation and track record demonstrate their ability to generate goodwill and deliver superior performance. A good reputation typically indicates a history of strong returns, ethical practices and reliability. Managers with strong track records might have positive reviews from industry analysts and testimonials from satisfied clients and partners. A manager who does not have a consistent track record may not be the best match if you are seeking a reliable partner to introduce alternative opportunities.
To evaluate a firm’s track record, ask:
Have your historic returns demonstrated consistency in delivering outperformance compared to benchmarks?
How have your funds performed during different market conditions, particularly during periods of volatility or economic downturns?
Client service and ongoing partnership are essential criteria as they will impact your clients’ overall investment experience. A manager with excellent client service is responsive, transparent, and proactive in communicating with investors. Managers with differentiated client service might offer more regular updates, dedicated service teams and resources that enhance both your own and the client’s understanding. Investors may want to reconsider managers who are difficult to contact or fail to address client needs promptly. A manager who demonstrates superior client service may be better suited to meet the needs of advisors, especially those who are new to private markets.
To evaluate the quality of client service and ongoing partnership, ask:
What does your firm do to offer differentiated client service when compared to other asset managers?
Does your firm have any dedicated support teams focused on client success?
The scale of a manager’s operations can impact their ability to execute investment strategies effectively. Large-scale managers may have better access to investment opportunities and more substantial partnerships, potentially leading to better outcomes for investors. In the case of advisors who are new to alternatives, managers with greater scale may be better suited to provide support and resources to ease the client education process.
To evaluate a firm’s scale, ask:
How does the scale of your firm give you a competitive advantage?
Could you describe the resources your firm offers to foster client education?
The experience of investment team members affects the managers ability to navigate complex markets and execute strategies with consistency. An investment team with superior skill may have extensive experience in relevant asset classes and low personnel turnover. Less effective investments teams may have a lack of diversity in their skillsets, inexperienced team members, or high turnover rates. For advisors seeking superior performance among many managers, investment team turnover could be a key differentiator.
To evaluate investment team experience, ask:
Could you describe the types of skillsets or areas of expertise represented throughout the investment team?
What is the turnover rate that the investment team has experienced since inception?
Alignment of interests ensures that the manager’s goals are in sync with those of their clients. A manager who prioritizes alignment of interests may invest their own capital alongside clients and use performance-based compensation structures. This alignment fosters trust and incentivizes the manager to prioritize client outcomes. Investors may want to reconsider managers who do not demonstrate a commitment to client success. Managers who go above and beyond to display alignment with client interest may be a good match for investors with limited alternatives experience.
To evaluate alignment of interests, ask:
What does your firm do to demonstrate alignment with your clients?
The range and quality of available investment opportunities is vital in achieving diversified high-performing portfolios. When including private markets in portfolios for the first time, advisors may wish to seek out managers with a depth of focus in differentiated investment strategies. Evaluate the manager’s access to unique, high-potential investments and their ability to identify emerging opportunities. A manager with a differentiated selection of available offerings may be more likely to provide a solution that fits into a given client’s investment plan.
To evaluate available investment opportunities, ask:
What differentiates your investment strategies and offerings from those of your competitors?
The investment approach employed by the manager should align with clients’ investment objectives and risk tolerance. Assess their approach to due diligence, underwriting, portfolio construction and risk management to determine if a manager’s priorities align with those of your clients. The best managers will have an approach to investment that is transparent, well-defined, and proven by a track record of success. Less effective managers may have a vague, overly complex, or untested approach, all of which increase the potential for risk and uncertainty.
To evaluate investment strategy, ask:
How do you prioritize capital preservation in the deal origination, underwriting and structuring process?
Fee structure and compensation models impact net returns and alignment of interests. Preferred fee structure and compensation models should be well-aligned with the overall level of investment performance and client service delivered by the manager. Assess whether the fees are justified based on the overall picture of how clients benefit from investing with the firm. Less favorable fee structures may be described as opaque or failing to incentivize performance. You may want to evaluate fees alongside performance, with the understanding that higher fees often demonstrate the ability to deliver superior returns.
To evaluate fees and compensation, ask:
Could you describe the relationship between your fees and compensation and the performance you have been able to deliver your clients?
Effective risk management is crucial in protecting investments and ensuring long-term success. Evaluate the manager’s risk management framework, including their approach to identifying, assessing, and mitigating risks. More effective managers may have a track record of managing risk successfully through various market conditions. An advisor who is new to private markets may want to avoid managers who lack a comprehensive risk management strategy or have a history of significant loss.
To evaluate risk management strategies an advisor might ask:
How do you identify, monitor, and mitigate potential risks within your investment portfolios?
Can you provide any examples of how your funds have managed previous losses?
Thorough due diligence processes ensure that investments are sound and align with client objectives. Assess the manager’s due diligence practices, including their research, analysis, and vetting procedures. Favorable due diligence processes may be described as rigorous, methodical, and demonstrating prudence and attention to detail. Poor processes may seem more superficial or demonstrate a history of inadequate vetting. If you are seeking a reliable partner for a first time-allocation, managers with rigorous diligence processes may be better equipped to protect your client’s investments.
To evaluate due diligence strategies an advisor might ask:
Could you describe your process for assessing the financial health and growth potential of a target company or asset?
Strategic partnerships can enhance a manager’s capabilities and access to investment opportunities. Evaluate the quality and scope of the manager’s partnerships with other financial institutions, service providers, and industry experts. Managers with strong, mutually beneficial partnerships that add value are differentiated from those who lack significant partnerships or are unable to leverage external expertise. If you are in search of diverse opportunities, you may want to prioritize managers with strong partnerships.
To evaluate strength of partnerships an advisor might ask:
How have you successfully leveraged your partnerships to provide differentiated opportunities to clients?
A manager’s approach to innovation and access points can affect investment flexibility and growth potential. Assess their use of innovative strategies and structures, such as evergreen funds. Look for managers who embrace innovation and access by adapting to changing market conditions to meet client needs. A manager who prioritizes access points for private wealth investors may be better suited to serve first-time wealth allocators. Investors may want to reconsider more rigid managers who fail to leverage new investment structures effectively.
To evaluate innovation and access points, ask:
How has your firm demonstrated a commitment to increasing access points for private wealth investors?