Simplifying private markets for RIAs via custom funds

We recently announced the expansion of our product offering to include custom funds, as we create new and personalized solutions for wealth managers. Michael Durso, co-founder and chief investment officer of ShoreHaven Wealth Partners - one of our earliest partners - has explained the benefits of our custom funds:

“Opto is streamlining the process of creating and managing custom private markets funds that offer the potential for diversification and attractive returns. Their access, relationships, and institutional knowledge—as well as efficient, user-friendly technology—offer tangible benefits to our firm and clients. What’s more, Opto has selectively deployed its own capital to secure access to certain managers and funds, which creates a unique alignment of interests with us and our clients.”

In the wake of the announcement, however, we have received a huge number of questions about what we precisely mean by “custom funds”. The term is used by a number of service providers, but (as should hopefully become clear) not all custom fund offerings are created equal. This article will explain what we mean by a custom fund, and talk about why demand is rising for these vehicles among wealth managers.

The evolution of private markets access

For many years, wealth managers have faced a challenge. While many are more than aware of the potential power of private markets to enhance their clients’ portfolios and better meet their long-term goals, the investment options available to them have traditionally been - to put it kindly - limited.

In the early years of private markets, basic access to the different asset classes was the fiduciary’s main challenge. There were few private fund managers that allowed access to smaller investors. This changed as private fund managers started to realize the scale of the potential demand from individual investors, and over the course of the 2010s, many (typically large) managers started to offer access.

In more recent years, quality and cost have become the new frontier. While many managers were offering access funds for high-net-worth individuals (HNWIs), these were often generic - providing exposure to a broad set of the firm’s funds - and relatively expensive. While access to private markets was available, many of the most exciting, emerging managers, remained out of reach for the majority of smaller investors.

A challenge throughout has been the additional administrative burden of executing private investments, and packaging them in a way that investors can understand and transact in with limited friction.

An appropriately structured custom fund - if executed with the right partner with an aligned fee structure and well-executed tech platform - can resolve many of the challenges around quality, cost, and administration for wealth managers. 

What do we mean by custom funds?

A custom fund, in an Opto context, is a single, fully-tailored and white-labeled fund composed of multiple underlying private funds, which you can on-board and manage via our technology platform.

Taking these in turn, what do we mean by “fully-tailored”? 

Our custom funds are a true partnership. We sit down with you to help you choose the fund composition that best suits the goals and profile of your practice and clients, including:

• Overall fund size

• Asset class allocation

• Sub-strategies

• Number of funds

• Fund type

• Investor suitability

• Fee structure

We can recommend specific funds in which we have high conviction that suit your fund strategy, but if you have a specific manager with which you want to work, we also have the ability to integrate them into a broader fund.

For example, you may want to create an “aggressive growth fund” for your less risk-averse clients with long investment horizons. This could, hypothetically, have a target size of $50M, feature a 50% allocation to private equity, a 40% allocation to venture capital, and a 10% allocation to opportunistic real estate, split across ten different underlying funds. Or an “income fund” for investors approaching retirement age, with a focus on private credit, infrastructure, and core real estate. It truly is up to you - though we are here to offer as much advice as you may need.

You can also tailor our level of service. We will be as collaborative and engaged as you want us to be. For example, service levels can span a spectrum that includes:

• Opto’s experienced investment team operates with investment discretion, taking into account your input and feedback

• Opto provides fund diligence and recommendations and operational software infrastructure, but you have full investment discretion

• Opto provides the software to streamline back-office administration tasks, while you manage due diligence and have full investment discretion

Second, what do we mean by “white-labeled”?

This one is pretty straightforward. From your investors’ perspective it is your practice’s fund, fully branded with your firm name, colors, and logo. This white labeling includes client proposals, all fund materials, and all client communications across the lifespan of the fund.

Finally, what is included when we say “on-board and manage”?

Once a fund has been structured and finalized, you can distribute it to clients on our software platform through a streamlined transaction workflow designed to minimize manual labor. An expanding range of integrations helps to bring investor profiles and existing allocations directly onto our platform. Our sophisticated yet intuitive analytics can help you decide on a recommended allocation for each individual and generate proposals to share with them. Finally, a simple reservation system helps you allocate cash from those investors to your custom fund.

It is important to note that, given the number and structure of the underlying funds, these are traditional, closed-end, drawdown funds. They are fundamentally illiquid, and are legally only available to Qualified Purchasers (QPs).

When the custom fund has been successfully distributed, Opto’s platform streamlines subscription document processes and centralizes investor documents, such as capital call requests and fund reports. All post-trade activity is reflected in custody and reporting providers, simplifying investment management. In addition, a dedicated client service team provides support across the lifecycle of the fund to help ensure your investors have a smooth experience.

Why might a custom fund be right for you?

There are many reasons why a custom private markets fund might be right for you. Here are just a few of them:

• The most simple is rising demand for private markets among HNWIs: In August 2022, 29% of HNWIs invested in the private markets, but that number is expected to increase to hit 46% as soon as 2024. Skating to where the puck is going is always a good strategy (particularly if that puck contains billions of dollars).

• Private markets investing is naturally a long-term process. Fund cycles can last for upwards of 10 years. Providing a total solution via a diversified custom fund may help encourage clients and their families to maintain a long-term relationship with your firm.

• Investing in multiple single-fund offerings could be an alternative, but requires a significant amount of in-house due diligence. A specialist private markets partner may be able to handle that more efficiently and more effectively. Furthermore, investing in individual funds means a lot of paperwork to execute, distribute, and manage those investments. A custom fund (or at least an Opto custom fund) could help minimize the administrative burden.

• Custom funds can create immediate diversification of exposure to a part of the market with a much broader range of potential outcomes. Diversification can narrow that range of outcomes and reduce risk. Fund-of-funds structures have been shown to significantly reduce downside risk.

• Investing via a specialist with established relationships and deep and broad networks, such as Opto, gives you access to certain highly-coveted managers that may be unavailable to you operating independently. In asset classes with a broader range of outcomes, manager selection and access are of paramount importance.

• White labeling helps elevate and institutionalize your brand, differentiating your firm as a leader in private markets, to both retain and attract clients in a fiercely competitive market. At the same time, your association with a sophisticated specialist, such as Opto, helps build credibility for your investment program in private markets.

• Custom funds executed with the right technology partner can simplify the process of scaling up to create a sustainable private markets program, given huge potential efficiencies in areas such as reduced paperwork and admin automation.

To start a conversation with us about how we can partner with you to create a custom fund tailored to your practice, email us at customfunds@optoinvest.com.