BlackRock executive West Lockhart talks to Funds Europe’s Laraib Shahid about the lessons of recent years and future opportunities for Eltifs in the private market.
Having experienced a slow start since its inception in 2015, the European Long-Term Investment Fund (Eltif) will “triple over the next two to three years”, says West Lockhart, BlackRock’s EMEA head of alternative specialists wealth.
Recognising the need to offer long-term investment opportunities, BlackRock entered the Eltif market confident the vehicle would be attractive to wealth managers wanting to distribute private markets to their retail clients, says Lockhart.
Even amid market uncertainty following the war in Ukraine and the Covid-19 pandemic, a particular appetite for private assets has developed in Italy, Germany and France, he says. Here, the market has seen significant wealth manager interest for Eltifs.
“Less than 2% of European wealth investors have exposure to private markets.”
Despite this, “less than 2% of European wealth investors have exposure to private markets”, says Lockhart, adding that many wealth managers would like private market exposure to be “closer to 10%”. Notably, that gap between 2% and 10% is driving much interest on the part of the wealth management industry, he says.
In recent years it’s been easier to access private assets for a broader base than just the big institutions. Wealth managers increasingly want to include private markets in their overall portfolio as a “strategic allocation” since it’s now easier to access private assets. And more individual investors want to benefit from private markets, Lockhart observes, either because they want greater diversification or the possibility of higher returns.
Lessons learned
The launch of the Eltif introduced several important considerations, given new enhancements approved by the European Council and the European Parliament coming into effect next year, he says.
Firstly, wealth managers must take a whole-portfolio view, meaning how private markets fit into the overall portfolio, what contributions it makes to risk and return, and the resilience of an overall portfolio. Thus, there is an imperative to consider the whole portfolio, says Lockhart.
The second consideration is the so-called “democratisation of private markets”, which he divides into two main parts: the importance of education and access to the market.
It is “fundamentally important” that wealth managers educate their clients on private markets, he says, and ensure clients understand the complexities of various asset classes.
“We feel that this will make us even more optimistic that more wealth managers will want to adopt the vehicle and ultimately more clients will have access to private markets.”
Those distributors who invest in education and take time to help clients understand private markets tend to get better results, he says. However, there is still a substantial amount of work to be done as an industry to continue to educate investors. “This is an ongoing exercise rather than a one-off event.”
Financial professionals and individual investors need to be educated, he explains, and meeting this need is a “priority” for BlackRock.
Besides education, one of the biggest barriers to private market adoption is technology and infrastructure accessibility. The lifecycle of a private markets fund depends on having the right technology and the proper infrastructure to facilitate the process, says Lockhart.
Worryingly, some wealth managers need more infrastructure or technology to deal with the process efficiently, he says. However, it is “encouraging” that there are now platforms to handle the private markets’ lifecycle better, such as Allfunds and iCapital.
So, access to private markets remains a critical need, with “more and more investors” being able to place private markets in their portfolios, he adds.
Enhancements
Revisions to the Eltif regulation, intended to channel more investments into businesses needing capital and into long-term investment projects, led to the recent introduction of the Eltif 2.0. Since only 81 Eltifs have been registered in the entire EEA as of December 2022, Eltif 2.0 is encouraging, says Lockhart. This is reflected in a recent BlackRock white paper he co-authored, ‘Eltifs: The quiet boom in EU wealth management’.
“We feel that this will make us even more optimistic that more wealth managers will want to adopt the vehicle, and ultimately more clients will have access to private markets,” he says. In addition, the enhancements will provide material improvements to portfolio construction, provide a positive investor protection framework, and contribute to growth in the category “as more investors embrace the vehicle”.
However, high levels of transparency and clarity around the liquidity in a specific product remain crucial. “Investors need to understand to what extent they will have liquidity or not have liquidity and under what conditions the liquidity might be withdrawn,” he explains. When transparency and clarity are lacking, investors are either “disappointed” about an outcome or there are potential challenges.
Liquidity remains a crucial topic for the industry, Lockhart says, and a robust framework is required to manage liquidity, particularly around private markets funds, which are illiquid by nature.
Sourcing is critical
People looking to purchase Eltifs typically want to gain exposure to private markets assets, which is a “closed-end format”, says Lockhart. Sourcing is “critically” significant, he adds, and general partners (GPs) need to source assets off-market or bilaterally at good prices, which is a performance determiner.
For example, BlackRock sees more than 7,000 deals annually, allowing the investment company to be very selective about which deals to invest in. He says the firm typically invests between 3-5% of that amount.
“Does the general partner have strong sourcing capabilities and good relationships to deliver that performance?”
Hence, he adds, from a private market perspective, for those wanting to invest in Eltifs, the critical question to ask is: “Does the general partner have strong sourcing capabilities and good relationships to deliver that performance?”
Eltifs and inflation
There is “certainly heightened” concern and questions from the investors about inflation, he says.
Investors are keen to explore if certain private market assets provide a better hedge against inflation than others, he notes. This is leading many investors to the infrastructure asset class, which is not only “counter-cyclical by nature” but also inherently has strong inflation-hedging qualities.
In Lockhart’s view, this is one of the reasons individual investors are showing greater interest in infrastructure – and it is this strategic allocation that he believes Eltifs are sure to grow in 2023 and beyond.
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