As mentioned above in the evaluation of managers, perhaps the most important thing is to follow the track record.
Without good performance, everything else is largely useless.
The asset management business has a complex problem: a good track record brings in more capital, and at some point, increased capital leads to a poor track record.
It bothers me a bit when it feels like the entire industry is chasing management fees and one hears very little talk about funds being raised because a new xyz strategy has been discovered that is expected to bring good returns.
Now, larger and larger funds are simply being replicated, aiming to do the same as the previous one but on a larger scale.
I don’t know where this will lead, and we will only see it several years from now. So, I’m slightly bothered by how sustainable this type of model really is.
I’ve often wondered what added value small investors get from wealth management. You study the basics a bit so you know what’s going on. After that, you invest funds in a few indexes, and that’s it. From my own experience of having coffee with a few offices, there’s rarely anything there that offers something new and special.
Managers live by performance; money comes as long as the results are good.
In practice, you need to generate excess returns to make money in the long run. This, in turn, requires a winning strategy. And every strategy has a limit to how much can be invested before returns start to decline.
For example, Capman states that one of their competitive advantages is local presence. There is an upper limit after which they can no longer allocate capital to the Nordics in a way that generates excess returns.
Security and effortlessness. Your logic applies to almost all services. If you put in a little effort, you don’t need the services of a car mechanic, barber, or handyman either. However, many people don’t bother or can’t even if they try.
Perhaps a somewhat poor analogy. To invest in the S&P 500 index, all you need to know is how to choose the right fund, and someone has already done the allocation for you very affordably. If you start messing around with individual stocks, then you should preferably know something. Salespeople just make easy things seem very difficult.
I do understand the significance of wealth management for large institutional investors, for example. They often have access to unique assets and deals simply due to their scale, which may not be available to small investors.
Maybe so, this PE perspective only came into the title and thread after my response. And it’s good that it did, there doesn’t seem to be a thread about this before.
A small investor who knows how to find the right S&P 500 fund is probably no longer the target audience for the private banking (PB) department. My point was that this country is full of people who have money but no time or any wealth management expertise, let alone interest in the subject. For them, a 2% annual return generated by their own wealth manager, which requires nothing from them, can be a reasonable deal. Someone with even a little interest in the subject will probably incur losses with PB services compared to self-managed wealth management, but that doesn’t eliminate the order for the service.
Small investors might not be the customer segment that companies are interested in at all. At eQ, 15% of private equity fund investments appear to be from family offices or private individuals. That’s more than I would have guessed.
At some point, we will reach a situation where current PE (Private Equity) classes can no longer take in capital without significantly diluting returns. The more relevant question, in my opinion, is what else can still be securitized? Or where in the world can new funds be established? Taaleri has had good starts in addition to traditional real estate and the unlisted market. For example, wind farms have been a truly innovative move that has fit particularly well with the current ESG (Environmental, Social, and Governance) spirit. Taaleri’s operational area is also quite extensive; in addition to Finland, they are in the US and Africa, for example, meaning they are not solely dependent on, say, the Finnish real estate market. So, it remains to be seen what the future holds.
This is definitely a growth sector. In the future, product development and innovations will play a significant role. Fierce competition is only a good thing for (small) investors – it lowers costs and increases innovation in investing as well as in all other sectors. If a fund or asset manager is terrible, why invest in it instead of something better? Good managers and products can be found if one is willing to dig a little. Or if one can build and develop real estate with better returns than a PE firm, then they should do it themselves.
The competitive situation may tighten for smaller companies, and it probably already has. I have a good amount of Brookfield in my portfolio; they are a leading provider of so-called alternative asset classes. The CEO once stated that when investing hundreds of millions, there are a dozen firms making offers. When investing billions, you are contacted directly, and the price reflects that.
Yes, good PE managers are valued in global stock exchanges at quite high multiples compared to our Finnish counterparts - although their track records are a bit better. In addition to Brookfield, EQT and Partners Group Holding are also worth exploring.
It seems there’s already a private equity thread, so I won’t create a new one, but I’d like to ask if anyone on the forum or at Inderes has experience investing in PE funds? I’ve been trying to search for firms that offer these to private investors. So far, I’ve found OP Alternative Portfolio fund, which has at least part of its capital in PE funds, Midas Equities, which apparently offers private access to PE funds and other alternative investments through its network, and Evli also offers PE fund-of-funds to private individuals, though with a 100k minimum commitment.
I’ve been offered the opportunity to invest in a couple of PE firms’ funds, one Finnish/Nordic and a couple of American ones. For a private investor, the challenge with the American ones has been the rather large amount of bureaucracy and paperwork (i.e., hundreds of pages of legal text). It’s easier in Finland. And the minimum investment in many is indeed at least 100k, usually larger for international ones.
The most significant blocker for me, however, has been taxation in Finland. I would first need to establish a holding/investment company through which to make the investments. It’s probably something I’ll have to do eventually anyway, but I haven’t gotten around to it yet.
A natural person’s share of the business income of a business partnership (i.e., a fund) is considered capital income up to the amount corresponding to a 20% annual return calculated on the partner’s share of the net assets belonging to the partnership’s business activities at the end of the tax year preceding the tax year.
The tax-exempt portion of dividends related to the partnership’s business activities (typically 25%) is deducted from the natural person’s share of the business income before calculating the capital income portion.
A partner’s share of the business income of a business partnership is considered capital income, regardless of net assets, up to the amount corresponding to their share of capital gains from real estate and securities belonging to the business’s fixed assets.
Any other taxable income exceeding this portion is considered earned income in the taxation of a natural person.
In practice, this means that if a fund receives a very large amount of income in a given year relative to its net assets, the majority of the income is taxed as earned income for a natural person. In practice, this situation is almost always at hand towards the end of a fund’s life cycle when the fund realizes its investments.
Oho, okay. I hadn’t looked into that taxation before. Good to know that 100k is the common minimum. So I’ll have to accumulate a bit more capital before I’m willing to allocate that much to one investment.
This makes my own investment firm practically mandatory, otherwise, only about 43% of the returns would be left in hand and the profitability of the whole thing would collapse.
How about pension, health, and unemployment insurance contributions in that situation?
