Identifying Private Wealth Investor Personas

Three Types of Investor Persona

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In this paper, we define and explain three investor personas and suggest how to lead a private markets conversation with each persona. We will also discuss case studies you can review with your clients who may be considering private markets investments.

Of course, every private wealth client is unique, with specific investment objectives, contractual obligations and restrictions. So, using personas to categorize your clients – at least initially – may help you position private markets investments to meet their specific needs. Keeping these personas in mind may even save you time and enhance your level of client service.

Persona Investment Preferences

How to Identify Investor Personas

As a private wealth advisor familiar with constructing portfolios, you know that there are subtle differences in why, how and when clients want to accomplish their objectives. Below are questions that can help you quickly uncover these differences, tailor a portfolio construction approach and, ultimately, strengthen the health of your advisory business.

Persona Questions

Investing in Client Relationships 

To see the type of investment journey that each persona typically goes on and ways to get them more involved in the private markets, jump to the appropriate section below: The Optimizer, The Fence Sitter, The Empire Builder

The Optimizer  

The optimizer may be newer to private markets and wants to maximize returns with minimal risk. For example, an optimizer might say, “I want an investment that can potentially outpace the market and do it with less risk.”

Risk
Long-Term Private Markets Efficient Frontier

Optimizers want to invest efficiently - if possible, precisely on the efficient frontier line. The chart above can show clients that their private markets return expectations for the same number of risk units (measured by standard deviation) would be about 400 basis points higher compared to the S&P 500. So, your optimizer clients may want to explore buyout and growth equity strategies that straddle the efficient frontier line as a logical extension to their equity portfolio. Venture capital, on the other hand, presents the opportunity to drive higher return potential in exchange for taking on more risk. Developing risk and return assumptions requires an analysis of long-term historical data, an assessment of strategy behavior during the "most relevant" time periods and forward-looking investment judgement.

The Fence Sitter 

The fence sitter prefers taking risk only if there are notable and actionable opportunities that they believe can lead to outperformance. They typically remain on the sidelines until there is a sufficiently appetizing deal. For example, a fence sitter might say, "I'm concerned about shifting conditions in the broader macroeconomic and geopolitical landscape, so I only want to invest if there is a qualified opportunity that takes advantage of these shifting conditions."

Sharing specific examples about how sitting out of the market can affect portfolio performance over time can help fence sitters get off the fence. The following case study can help you orient that conversation.

Case Study 

Many investors, even those who understand the long-term benefits of private markets, may question their risk exposures in the face of uncertainty. Fence sitters, especially, may sit on the sidelines for longer because they believe that there are investment opportunities elsewhere which can generate higher returns than private equity.

If your client is a fence sitter who believes that the markets might be choppy going forward, they may be hesitant to invest in what they perceive as “riskier” private markets investments. In this situation, you have an opportunity to help fence sitters understand the benefits of incorporating private markets investments into a broader portfolio. Sharing the following chart as a guidepost may be helpful.

Performance by Public Market Regime
Private Equity Average 4Y Excess Return by S&P 500 Return Regime

While PE returns are (relatively) compelling in nearly all market conditions, liquidity is a valid concern. Especially for the fence sitter, who is prone to worrying about her liquidity position. Additionally, while a larger private markets investment will also increase the percentage of a client’s illiquid assets, introducing evergreen funds into the conversation can help remove clients' hesitation.  

Evergreen, or semi-liquid funds, generally provide subscription and redemption options that offer liquidity. In an evergreen fund structure, the fund is continually accepting additional capital and making new investments and presents the option to redeem earlier than a traditional closed-end fund, which typically holds investors’ capital for 10 to 12 years until the underlying assets are sold. Discussing this with clients, along with the fact that private markets have historically helped improve portfolio risk/return characteristics, can help ease fence sitters’ macroeconomic and geopolitical concerns. 

The Empire Builder 

The empire builder prefers long-term allocation strategies with simplified access. They are typically a wealthy, sophisticated investor who has conviction in the long-term performance of private markets. Like optimizers, empire builders want to maximize returns with minimal risk to preserve and grow their wealth. For example, an empire builder might say, "I want to be able to deploy capital quickly when opportunities for outperformance arise but am otherwise comfortable with slow and steady gains."  

Case Study 

The empire builder is already convinced that they should start building a private markets exposure and want to know the best options for building their empire. The case study below can be used to help empire builders understand the differences between slow and steady pacing versus quickly building private markets positions using new tools.

In this case study, an empire builder is considered an experienced investor with a $25 million portfolio, an average commitment size of $100,000 - $150,000 per fund and an annual commitment pace of $500,000 per year.

Pacing
Portfolio NAV and Annual Commitment
Portfolio 1:

Portfolio 2:

Here are two approaches to reach a target allocation using drawdown funds. In both scenarios, pacing and portfolio concentration differ.

• Portfolio 1: In the slow and steady pacing scenario, if a client were to commit $1 million every year, they would reach their target range by year seven. Seven years can be a long time for an investor, but they would only slightly exceed their target, which is positive. This scenario is optimal for controlling the build and achieving vintage year diversification goals but takes some time to complete.
• Portfolio 2: In the New Tools scenario above, evergreen private equity vehicles are fully funded and fully deployed on day one. Deploying $1 million from the outset and operating a satellite of fund exposures can allow clients to quickly hit target allocations and manage their exposure.

Building with Evergreen

Annual Commitment Using Evergreen Structures

To help empire builders reach their target allocations sooner – without overshooting their allocation – they may want to quickly deploy capital into historically favorable investments, such as private equity. 

Conclusion 

Using personas can help you tailor private markets conversations with your clients and offer investment options that fit their objectives, such as: 

1. Historically favorable risk/reward potential. 
2. Access to a more diverse set of investment opportunities. 
3. Investments that span strategies, structures and sectors.

To find more ways to efficiently engage clients and start private markets conversations, visit Hamilton Lane's Advisor Practice Management portal.