The financial services industry must fill an education gap and provide more transparency to help advisors and clients better understand private markets, leaders suggested Thursday.
The panel discussion at the Investment Company Institute conference in Washington came as private credit markets have faced pressure from investors who, concerned about certain corporate loans, have sought to redeem billions of dollars in investments.
"I think we're in a relationship business at the end of the day. And I think the issue right now that we have is there's a big question mark around trust of what we do," said Shane Clifford, global wealth head at Carlyle Group.
"And I think it's incumbent upon us to be able to articulate what we do in a way that's digestible for the average advisor out there in the field who ultimately needs to be able to (pass) that on to the end client," he added.
"Ultimately, I think we are doing ourselves a disservice when we say things like 'semi-liquid.' It should be 'semi-illiquid' maybe, might be a better way, or 'we're semi, not liquid at all.' … Words matter in this business right now. Trust matters. I live it day to day. We need to regain the trust of a lot of folks out there," Clifford said.
Mass Affluent Market Concerns
Carlyle is taking care in weighing how to bring private assets to the mass affluent, he said.
"I think we've got to be very cautious here in the short term as to how we engage and enter that broader kind of mass-affluent market. I would say our firm's taking a very, very cautious approach. We're really uncertain as to how far we want to go out on the spectrum right now. We're definitely going to have to have partners to do it. We don't have the distribution capability vis a vis that," Clifford said.
"So therefore from an education perspective, that's important for us. And then you've also got this retirement angle that's come on. So I think the challenge today for all of us is the explosive growth that continues to come from the wealth side versus the very mature institutional LP market. And how are we as good fiduciaries of our current clients going to bring the right structures to market going forward that are appropriate for the mass affluent? I don't think we're there right now," the Carlyle executive said.
Advisors need to help clients understand that private credit investments aren't meant to be traded frequently like public assets, panelists suggested.
"If we're talking about the wealth space, you have to tell your clients that this is essentially an access point for your clients into an illiquid investment. In other words, this isn't a trading vehicle; it's an illiquid vehicle," said Robert Stark, president and deputy CEO, Nomura Asset Management International.
"This is not supposed to be a trading decision. So it goes back to helping financial advisors in particular, how to think about these type of fund structures in the context of broader portfolio allocation," he added.
Stark also cited an educational gap in helping people understand that private credit is much broader than direct lending.
Private credit investments may not be right for everyone, he said.
"I think my answer to your question is no, not everyone should have access to these type of exposures, vehicle and structures," Stark said. If someone has $100,000 to invest and puts $5,000 in a private credit fund, "which fund are you going to pick? How do you get some diversification? So unless you pick a fund that's highly diversified across asset classes within private credit, that could make sense."
He then cited the headache that could cause for an advisor.
"The liquidity crunch that that individual or that household can get into easily doesn't necessarily lend itself well from my perspective to these type of exposures," Stark said.
Carlyle's Clifford said it would be great for the industry to be consistent in how it reports data. That wouldn't change how firms invest "but I do think it would help folks in terms of understanding and on an apples-to-apples basis being able to look at the funds, because today folks are reporting in slightly different ways. So I'd like to see some consistency around the data and the reporting and the transparency, which I ultimately view as a very, very positive thing."
Investors need credit exposure for true diversification, whether it's opportunistic credit, collateralized loan obligations, public credit or direct lending, Clifford said.
"I use the example all the time of the Wilshire 5000, which now only has 3,400 companies in it," he explained. "We've preached to advisors and to end clients the benefits of diversification, I think it is absolutely shocking on us as an industry if we do not preach the benefits now of that broad allocation."
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