The industry push for registered investment advisors to give clients access to private market investments could have a knock-on effect beyond diversification and yield: it may raise the value of a firm in a sale or merger.

That’s according Sanctuary Wealth’s Patrick McGowan, one of the speakers at RIA Edge Private Markets conference on Thursday in New York City, who said the $16 billion RIA has leaned into private market investing with clients, and sees benefits of client lead generation, retention and the opportunity to expand wallet, adding to a firm’s overall value in the market. 

“I think you can reasonably, over a 10-year-period, go from about a 2.5x [multiple] to about a 3x just in the growth of the underlying assets of the firm due to market appreciation by making an investment in private markets,” said McGowan, managing director and head of alternative investments of Indianapolis-based Sanctuary.

McGowan is in favor of private markets due to macro-factors, including the shrinking pool of public companies, stock market concentration among a handful of firms and the strong returns shown by areas such as private equity. But beyond these trends, he said the $100 trillion wealth transfer between generations was a key driver of both client retention and growth for RIAs.

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For one, McGowan said, younger generations have shown a preference for private market options over the more traditional stock and bond investments of their parents or grandparents.

“I believe that—and based on the conversations we have internally—that the heirs will ditch you if you stay in stock only and traditional portfolios,” he said. “You’ll just lose the assets during the wealth transfer.” 

Second, he noted that about $20 trillion of wealth transfer is in real estate holdings. If a financial advisor is not well-versed in managing private real estate investment opportunities and tax strategies, they are likely to miss out on some of this money.

McGowan and other panelists emphasized the importance of advisors being well-versed in real estate tax strategies, such as a 1031 exchange, which defers capital gains when a property is sold, and a 721 exchange, which places a property into a real estate investment trust and offers partnership interests to the parties involved.

“If you’re not focusing on private markets, but also things like 1031 and 721 transactions, you’re going to lose anywhere from 20% to 50% that your RIA runs through the generational wealth transfer,” he said. “If you do adopt private markets, you’re going to be the receiving end of that, and that’s going to make your business perform better. It’s also going to probably give you a higher multiple and be more valuable.”

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Value Creation

Will Sterling, partner and chief investment officer at RIA TritonPoint Wealth, said on the sidelines of the conference that his firm was not considering valuation when it focused on private markets for ultra-high-net-worth clients. But he did agree that the focus area helps with client retention and growth.

“The utilization of private markets is driven by serving more clients and helping more clients,” he said. “They’re going to have a great experience, they’re going to talk to their friends and family, we’re going to be more competitive, and our business is going to grow.”

Sterling said that when he and his partners founded TritonPoint in Chevy Chase, Md., in 2023, his expertise and interest in investment management made it a good fit for the firm to determine how to offer private market investments to clients. 

The RIA took a partnership approach with subadvisors, collaborating with RIA Quotient Wealth Partners to establish a joint relationship with custom private markets provider Opto Investments. 

Sterling told the audience of RIAs that the custom, multi-investment approach to private market investing aligns with the firm’s RIA, fiduciary-driven approach. He believes that one of the issues with private market options was that they took firms “back to the brokerage model” because it put advisors in a position of selling clients on a manager or product solution.

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“That was the need to solve—we needed to create an outcome where it would be better from a portfolio construction perspective that made sense in the realm of everything else we’re doing,” he said. “That was our North Star, if you would, from a fiduciary perspective.”

Sterling also said the investments are only available to qualified clients with a certain level of investment assets, rather than what might be considered high-net-worth or mass affluent.

Another speaker from the investment platform provider, AssetMark, spoke about creating a product offering that could reach a broader audience of investors. 

To achieve this, AssetMark launched an interval fund, allowing advisors to allocate clients’ investments across private equity (via Apollo Global Management), real estate (managed by KKR & Co.), and infrastructure (managed by Stepstone Group) in a customized mix. 

“Our advisor base has historically skewed toward more of the mass affluent marketplace, though many are starting to very credibly compete for high net worth and ultra-high-net-worth investors as well,” said Phill Rogerson, SVP, head of RIA channel at AssetMark. “As we approached this problem, our challenge was, how are we going to help advisors access this particular space?”

Rogerson said on the sidelines of the event that, while its private market originator pool is currently limited to larger providers, he said what will be available to advisors and clients would grow as AssetMark and others continue to evolve their offerings.

Tax Advantages/Disadvantages

Panelists at the conference also stressed the tax advantages that private market investments can increasingly bring to advisors as a differentiator. 

“Everybody loves to save on taxes—it makes everybody happy,” said Noreen Brown, co-chief investment officer for RIA Summit Financial, based in Parsippany, N.J. “There are so many opportunities in the private space to give advice to larger clients and the positive and negatives across the different kinds of tax reporting.”

Brown cautioned that the tax benefits vary by private market type, with private credit being the least tax-efficient asset class, and real estate providing more opportunities.

Brown said the area of Opportunity Zones, or investments in economically distressed areas that may defer or eliminate capital gains taxes, is a growing area of interest and opportunity. But even here, she said, advisors need to vet the opportunities.

“The due diligence on the manager is super important in these spaces,” she said. “Some structures have client assets locked up, so some asset managers may not be incentivized to maximize the value of the property.” 

Bob Hostetter, chief investment officer of Chicago-based VestGen Wealth Partners, said advisors should also be aware of the tax filing needs and procedures, which may require a third-party partnership.

He noted his firm’s work to streamline the K-1 tax form, which is used to report on partnerships, such as private equity or real estate funds. 

“You need to invest in a platform that’s going to consolidate K-1s,” Hostetter said. “I think that a lot of advisors are just looking at this space and privates and saying, ‘Gee, I’d love to be a part of a firm that does all this for me and make sure that all of that gets done.’ I think that’s one of the reasons firms like us are growing. Some services can roll those things together, but it’s hard to access a lot of those at scale.”