Illiquid assets

GLOBAL INVESTOR 1.15 — 55
product, and the liquidity provider will
typically buy at a discount to the actual net
asset value of the product.
Are entrepreneurs more likely than other
investors to favor illiquid assets?
Felix Baumgartner: It’s a good question.
As owners of their own company, they’re
more open to illiquid investments. They
probably have 80% of their total wealth invested
in the company, and they’re comfortable
with that because they know what
is going on with it. Of course, if they already
have 80% invested in their company, it
makes no sense to put the rest in illiquid
assets as well. So we would tend to advise
them to maybe put 5% in private equity,
if they really want that, and keep the rest
in cash or in liquid assets.
How much do clients want to know before
they decide on an illiquid investment?
Patrick Schwyzer: What I see in most
discussions is that clients want to understand
the thought process and how we
do things. They want to understand how
we come to the selection of a particular
manager, be it in the private equity or the
hedge fund space. They don’t really want
to receive the full package on the due diligence
report and go through it themselves.
That’s exactly why they come to us.
In terms of cycles, is it fair to say that
investor appetite is back where it was
before the financial crisis?
Felix Baumgartner: Absolutely. Investors
are looking for opportunities. Clients,
and especially Swiss clients, often want to
leverage their portfolio, also the illiquid
parts. It’s analogous to taking out a mortgage
on real estate. And banks are increasingly
amenable to offering credit (assessed
on the basis of loan to value, or LTV) on
illiquid assets. We clearly limit the risk in the
interests of both the client and the bank.
Patrick Schwyzer: Another cycle- related
example: before the 2008 financial crisis,
there was a lot of movement into the socalled
fund of hedge funds space, particularly
in Switzerland. After the crisis, those
private investors left that space. And now
we see them coming back, as providers
begin to offer a selection of carefully vetted
single-manager hedge fund products or
advisory services.
Has the rise of family offices played
a big role in increasing the allocation
to illiquid assets?
Patrick Schwyzer: It depends on the
type of family office. The smaller ones that
literally are a family of two or three people
have one investment specialist who needs
to cover everything from bonds to alternatives.
In that case, they’re looking to us to
help them put together their own portfolio of
hedge funds. Bigger family offices typically
employ their own private equity specialist
or hedge fund specialist, but like to talk to
us as a “sparring partner.”
Felix Baumgartner: Investment behavior
and interest can also change dramatically.
We’ve seen that over the last one or
two years. Some family offices that previously
invested only in traded equities with no
allocation in private equity because of
worries over illiquidity, decided to go into it
within the space of three or six months.
Are fees an issue for clients?
Patrick Schwyzer: Certainly, pre-2008,
the predominant means of investing in
hedge funds for the private sector was fund
of hedge funds. And there you had a double
layer of fees: the underlying managers
who on average were going to charge you
a 2% management fee and a 20% performance
fee; and the additional level on
the fund of hedge funds where the manager
would pick and choose those funds. We
have seen a clear trend toward single funds,
which has removed one of the fee layers.
The second layer is also under pressure.
It comes down to performance. Good
performance is clearly needed to justify the
fee levels.
“The order of preference that
we observe is: real estate,
then hedge funds, followed
by private equity.”
Felix Baumgartner