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Though the cost is significant, the benefits of flying private are substantial. It provides you with tremendous convenience and reduces travel stress as you skip the security line, sometimes driving right onto the tarmac to board your jet. For business travelers, the flexibility to be able to book flights at a moment’s notice, the productivity associated with hosting collaborative meetings mid-flight and the positive image a corporate jet conveys are all huge benefits. It also can save you a lot of time since you will be able to fly directly to your destination instead of having to change planes which is becoming more common in commercial air traffic. As for comfort, you’ll be sitting next to your companion, with your pet by your side, in an incredible leather recliner with plenty of leg room instead of being crammed into a row of six. Finally, flying alone on your own aircraft helps maintain personal privacy and keeps you isolated from other possibly ill travelers.

There are several critical questions to consider when determining which of these most popular access options will best suit your needs: 

• Chartering a jet
• Buying hours on a jet card
• Considering fractional ownership
• Purchasing or leasing a jet

1. 1. How many trips do you take per year? 
      Probably the single most important question to ask yourself is “how many hours do you fly per year?” This will help you determine if it’s most beneficial to charter or purchase a jet. While your net worth and annual spending certainly come into play when making this significant decision, how much you plan to fly is more important. Someone who takes two short trips per year on a turboprop may only spend about $10,000 in charter fees, while a corporate executive who travels 2-3 days per week on an ultra-long-range jet should be prepared to spend millions in travel costs, tens of millions if they purchase the jet.
   2. Where do you typically fly?
      Another important variable in the equation of how to fly private is “where do you usually travel?” as this will help you determine what equipment you will need for the mission. Once you identify your destination, you can calculate how many nautical miles it will take to get there. Then, use the speed and range of an aircraft (see our Equipment Guide in Appendix A at the end of this paper) to determine what type of plane can get the job done. Keep in mind that many exotic destinations are surrounded by mountains and water so runway length may be a consideration as well. Though a turboprop is not as fast and comfortable as a larger jet, it can access most of these hard to get to locations. St. Barths in the Caribbean is a perfect example of this. The runway is only 2170 feet long, so you need a Short Take Off & Landing (STOL) plane like a Pilatus PC-12 and a pilot who has the training to accomplish a feat akin to landing on an aircraft carrier. Most high-end travelers will utilize larger private jets to get to Puerto Rico or St. Martin and then switch over to a turbo prop to shuttle them across to this secluded island.
      
      
      A family that has homes in two locations is the easiest to solve for, while someone who has 3+ homes and flies regularly for business is significantly more complex. Take a couple who lives just outside of Washington D.C. and has a vacation home in Kiawah Island, South Carolina. They travel back and forth about once a month (4-hour round trip X 12 times = 50 hours approximately). They choose to purchase a 50-hour jet card with Wheels Up that enables them to fly from Washington to Charleston on a King Air 350i turboprop. Another family has homes in Massachusetts, Florida, Colorado, and California. While a light cabin jet with a range of 1900 nautical miles can transport them comfortably from Boston, MA to Naples, FL, they need a midsize or super-midsize to get them from the East Coast to their home in San Francisco. A family that requires the use of different types of equipment should consider chartering, participating in a jet card or fractional platform that allows flexibility or putting a purchased jet into a charter pool where they can utilize other owner’s jets.
      See our Equipment Guide in Appendix A
      
   3. Who will be traveling with you?
      Now that you know where you are going and how often, it’s time to determine how many people will be traveling with you. If the kids are grown and out of the house, maybe it’s just two of you heading to Florida or Colorado for a long weekend. In contrast, some families like to travel with kids and grandchildren which can require a larger aircraft. After you have completed the head count estimate, think about how much luggage you typically need. Are you someone who travels light because you already have everything from clothes to toiletries at your vacation homes, or do you (or your significant other) tend to pack everything but the kitchen sink for a weekend away? Private jets do not have the cargo space that commercial planes offer, so this should factor into your decision regarding equipment needs. Finally, would you enjoy bringing your pets with you? They will require additional space onboard, and some charter services/platforms may not allow them. Candidly, the desire to travel with beloved family pets is one of the top reasons that many people fly private. They bounce from one home to another for weeks at a time and do not want to leave their pets behind but also do not want to subject them to flying beneath a passenger jet-like luggage.
      
   4. When do you typically travel?
      Anyone who is has ever booked a flight for the week between Christmas and New Years can tell you that when you want to travel is almost as important as where you want to go. Private jet charter rates go up dramatically and, in some cases, can nearly double for high-demand days and holiday periods. Many jet card programs have restrictions that limit or prevent their members from using their travel hours around the top 40 to 50 travel days. Fractional aircraft owners are often required to give advanced notice. Thanksgiving is the perfect example as blackout dates do not allow you to travel in some cases from the Tuesday before Thanksgiving until the Monday after. Prior to signing up for any program, make sure you have done a detailed analysis of your typical travel dates and read the fine print regarding peak date restrictions. If you plan on chartering for a holiday trip, book early as these flights are often very popular, and prices only increase as the date approaches.
      See our List of High-Demand Days and Holiday Periods in Appendix B.
   5. How flexible are you when it comes to booking trips, making travel changes and cancellations?
      Flexibility when it comes to booking, canceling, and making changes to a trip is another significant consideration when deciding on a private aviation strategy. Families who do not work 9 to 5 and no longer have kids in school have a lot more freedom than a company CEO who needs to board a flight first thing in the morning to discuss an important merger or acquisition face-to-face. Every family is different on this front. Some preplan every trip a year in advance, while others decide on a whim or unexpected weather change to pick up and fly south for more warmth or go west to catch a recent dump of fresh powder. Having your own jet gives you ultimate flexibility, however, that comes with a significant price. While chartered aircraft are readily available to most destinations and times, reserving them last minute will also cost you a pretty penny. If you plan to buy a jet card or a fractional share, make sure you fully understand the rules associated with last-minute bookings and changes.
      
   6. Do you prefer brand new equipment or is older equipment acceptable? Just like buying a car, there can be a significant difference in features, comfort, and price between the latest model to hit the market and a used aircraft that has been around for a few years, so you will need to weigh the pros and cons of flying new equipment versus realizing cost savings with used. To determine the “true age” of an aircraft, calculate its remaining service life using the number of years since it was built, its total flight hours, and the number of takeoffs and landings. The average private jet is between 1 and 40 years old with most inside of 25 years. Planes that are older than 20 years are considered “old”, while those 10-20 years old are “standard” and those younger than 10 years old are considered “new”. Most private jet operators put between 300 and 1,000 hours on a plane per year. This means that many standard jets will have about 10,000 hours on them while older equipment can exceed 20,000 hours if well maintained.  Maintenance history is key. This is probably the biggest difference between chartering a plane vs. embracing a jet card or fractional ownership plan. While you can pay a premium to charter a newer piece of equipment, there are a lot of older jets in the charter market. Private aviation membership and fractional platforms like NetJets and Flexjet typically have much newer aircraft. Those considering the outright purchase of planes should keep in mind that it will only be the “new, new thing” for several years before more advanced models come out. Though some choose to upgrade their jet every few years to stay current, this can be very expensive over time, as the most significant depreciation of the asset occurs in the first year. For business-use jets, many companies maximize the tax depreciation of the equipment and then upgrade when it is done. Many of the newer jets are faster, have longer range and cabins that are more comfortable for passengers. That said, many jet owners have gutted and completely refurbished the interior of their planes to give older equipment a more modern look and feel. In addition to the aesthetics, this can also include updating the jet’s electronics and instruments to keep up with changing technology and industry standards. For many people in the charter market, this is the ultimate “value trade” as it looks new, but the rate is lower to reflect the plane’s age.
      
   7. Will your travel be for personal reasons, business travel or both?
      From a complexity standpoint, another significant determination as to whether the plane will be used for personal trips, business travel or a mix of both. If you use the equipment for any business travel, it is incredibly important to keep a detailed log of everything from where you traveled to what company you visited to see, who was on the flight, their role in the organization and why they needed to join the meeting. These records will help you maximize your aircraft cash flow while minimizing your tax liabilities. They will be used to prepare your company’s aircraft-related federal / state tax returns, in aviation financial reporting for regulatory bodies like the SEC and in aircraft-related audit defenses with the IRS/state. Whether you have an accounting team with private jet taxation experience or choose to partner with a specialty firm like Aviation CPAs, it’s crucial to work with someone that has experience in navigating the often-conflicting FAA and IRS rules, layered regulations, and compliance issues that you will face in business aircraft ownership. Though some try to keep records in a standard Excel spreadsheet, we highly recommend that you either outsource it entirely or utilize software like Flight Tax Systems to record all your trips. This will help you keep track of the Standard Industry Fare Level (SIFL) which is the taxable fringe benefit charged to employees for non-business use of the company aircraft. Companies are required to disallow aircraft costs, expenses, and depreciation from non-business flights which involves a specific calculation. Flight tracking software also allows users to track Qualified Business Use (QBU) for § 280F Depreciation Recapture for Business Aircraft. You will need to track days, miles, and landings within applicable states, which can result in substantial taxpayer savings on state sales tax filings. If your company is public, your CFO will need to report the incremental cost of your personal use of a business aircraft for proxy disclosure purposes. That said, even if you only use your private jet for personal travel, it is still important to keep detailed records so that you or your team can perform an annual analysis to optimize your use of this expensive asset.
      
   8. When it comes to safety, what certifications do you require?
      One of the most important questions to ask when booking a private charter or purchasing a jet card or fractional ownership from a platform is, “have they been safety audited by one of the four major ratings organizations (IS-BAO, ARGUS, BARS & Wyvern) and what level did they achieve?”
      The International Standard for Business Aircraft Operations (IS-BAO) was created by the International Business Aviation Council because of the need to provide standards that look beyond those of the FAA’s for operators that provide international flights. IS-BAO audits use benchmarks created by the International Civil Aviation Organization, which are recognized around the globe. IS-BAO-registered operators are those that follow international best practices, perform internal audits, and pass third-party IS-BAO audits to receive a Certificate of Registration from the IBAC Standards Board. IS-BAO has three stages (I, II, & III) of safety auditing, with stage III being the most prestigious and most difficult to achieve.
      
      
      The Aviation Research Group US (ARGUS) audits an operator’s maintenance records, flight history, insurance coverage, the frequency of aircraft inspections and a program’s ability to meet or exceed FAA standards. Other considerations include flight hours, pilot training, and their medical records. ARGUS has four rating tiers for operators: Does Not Qualify, Gold, Gold Plus and Platinum. All ARGUS-rated operators must provide the auditing firm with its latest records to ensure that they’re cleared before each flight. Before flights, a “TripCheq” can be requested that provides further information about a specific crew and plane.
      
      
      The Basic Aviation Risk Standard Program (BARS) was developed by the Flight Safety Foundation (FSF) in conjunction with the onshore resource sector to provide a system of oversight for the contracted aviation sector. Operators undergo an annual audit to the BAR Standard to become registered BARS Aircraft Operators (AO). Color code designations are applied to the operator’s BARS registration that include amber, green, silver and gold which is their highest rating.
      
      
      Wyvern Consulting offers different levels of audits that comply with private aviation industry standards. Registered Operator is its entry-level program in which operators have their records on file in the due diligence-related Registered Standard PASS Program that Wyvern’s corporate, operator and broker clients can access before a flight. (Wayvern’s PASS is similar to ARGUS’ TripCheq system.) The highest-level tier for Wyvern is the Wingman Program which is much more difficult to obtain.
      
      
      To determine if a charter company or private aviation membership platform is certified, and at what safety rating, you should inquire with the private jet operator directly or check the company’s website. One reason chartering a jet can be less expensive than the major membership / fractional platforms is that they typically only acquire one to two safety audit certifications, and their resulting ratings are often lower.
      
      
      Safety Certifications*

      International Standard for Business Aircraft Operations (IS-BAO)
      Good	Stage I	Demonstrated the establishment of an appropriate Safety Management System (SMS) and that safety management activities are appropriately targeted.
      Better	Stage II	Ensures that safety management activities are appropriately targeted and that safety risks are being effectively managed.
      Best	Stage III	Verifies that safety management activities are fully integrated into the operator’s business and that a positive safety culture is being sustained.
      Aviation Research Group US (ARGUS)
      Good	Gold	Meets or exceeds ARGUS standards and the company does not have outstanding safety issues or history.
      Better	Gold Plus	Meets all of the Gold standards, along with an ARGUS on-site safety audit or registration with the IS-BAO.
      Best	Platinum	Meets all of the Gold Plus standards, as well as have an emergency response plan and a functioning safety management system.
      Basic Aviation Risk Standard Program (BARS)
      In Process	Amber	Indicates the audit has been conducted and non-conformities are still open within the allocated time (normal for the renewal cycle).
      Good	Green	Indicates that the operator has undertaken an audit and closed all priority 1 and P2 non-conformities.
      Better	Silver	AO has conducted two audits with the renewal audit before the current registration expired and closed P1 and P2 non-conformities within the allotted timeframe.
      Best	Gold	AOs have completed two or more renewal audits before registration expiration and closed the P1 and P2 non-conformities within the allocated timeframes.
      Wyvern Consulting
      Good	Registered Operators	Provides Wyvern with their records, makes them available to their clients to review and meets certain standards. Has not been audited by Wyvern.
      Best	Wingman Program	Must follow specific methods that reflect the latest and best safety practices. Have been audited and have passed Wyvern’s audit standard.

      *Source: International Standard for Business Aircraft Operations, Aviation Research Group US, Basic Aviation Risk Standard Program, & Wyvern Consulting

   9. Does privacy matter?
      While many athletes and celebrities enjoy the privacy of flying private so that they do not have to endure enthusiastic fans pressing for photos and autographs, it is not as private as you might think. Private jets ownership can easily be tracked via the equipment’s tail number or the ADS-B technology that every plane in U.S. airspace is now required to carry which anyone with the right antennae can pick up. This information has become very valuable in recent years as it’s often used by hedge funds, competing companies and the media to predict mergers and acquisition targets. A business deal of that magnitude often requires multiple trips to the other company’s headquarters, so it is quite easy—and perfectly legal—to figure out, since the information is readily available to the public. Though some companies will try to block access to this data by registering their corporate jet to another legal entity, it’s still possible for motivated parties to uncover the owner’s identity. The preferred way to mitigate these types of risks and to maintain your privacy is to charter a jet or take advantage of an anonymous pool of planes via a jet card or fractional ownership program.
      
   10. How has the industry changed post-COVID and how will it impact me?
       The COVID-19 pandemic has had a huge impact on the private aviation industry. For health reasons, many people no longer wanted to fly commercial or couldn’t during the shutdown so the demand to fly private skyrocketed. As we all learned in Economics 101, a substantial shift in demand typically results in an increase in price, but in this case, the supply side of the equation has also been impacted sending prices even higher. To further exacerbate the problem, we have also witnessed a shortage of qualified labor to operate and service the private jet industry. As a result of all these factors, the cost to fly private has increased significantly on everything from chartering a jet to purchasing a jet card or fractional ownership to buying the equipment itself, if you can find it. The shortage in planes has made it very difficult for potential buyers to locate what they are looking for and, in some cases, they have had to engage in bidding wars to be able to secure one. The pandemic-related supply chain issues that have limited the availability of planes have also caused frequent flight delays and cancellations due to trouble getting aircraft parts. To combat the rapid growth of the industry, most major providers of jet cards and fractional ownership have made changes to slow the demand. This includes price increases, altering dates some customers can fly, requiring advanced notification to book flights and not allowing new clients onto their platforms.

Conclusion

If all of this seems incredibly complex to you, that’s because it is. One of the benefits of having your own single-family office or being part of a multi-family office is that they often help you with private aviation consultation, charter booking and aircraft management. At Verdence/Family, we help our clients do this complex analysis to determine their travel and equipment needs so they know which solution is right for their situation. Once we help them make the determination of how they are going to fly privately, we allow them to fully enjoy the experience by comparing quotes, scheduling missions, and keeping detailed records of their flights for tax purposes and expense optimization. Private aviation is one of the world’s most sought-after luxuries, but it can be a complexity nightmare with plenty of opportunities to overpay so make sure you do your homework or partner with the right team to advise you.

Appendix A: Verdence Equipment Guide* (Gold= Verdence first choice; Gray=Verdence second choice)

*Source: Jet Linx, Stratos Jets, Magellan, Wheels Up, Plane Sense, XO, Fly Exclusive, Net Jets, Flexjet, VistaJet, Grandview, Sherpa Report: Guide to Private Aviation 2021 & Verdence

Appendix B: High-Demand Dates and Holiday Periods*

*Source: Net Jets, Flexjet, Wheels Up & Verdence

Disclaimer:

This material was prepared by Verdence Capital Advisors, LLC (“VCA”). VCA believes the information and statistics contained in this document were obtained from sources considered reliable and correct and cannot guarantee either their accuracy or completeness.  VCA has not independently verified third-party sourced information and data.  Readers should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized advice.  For questions about this document, please contact us.

10. Want to leave a lasting impact on the world through philanthropy but aren’t sure how

9.  Lots of bills to pay and you constantly worry that one will slip through the cracks

8.  Would love an annual family meeting that’s both well organized and engaging, so it’s more likely everyone attends

7.  Concerned that the investment portfolio that got you here may not be the right one going forward

6.  Preparing to start a new business or sell an existing one and need an extra set of eyes on the transaction

5.  Coordinating all of your external advisors (Tax, Law, Insurance, etc.) has become a full-time job

4.  Getting ready to purchase another vacation property and need help acquiring, financing, and managing it

3.  Struggling with whether or not to fly private and the best way to do it

2.  Need to start talking to your children about your wealth but need help doing it

1. Your life has simply become too complicated and you need help

Whether you accumulated wealth over a lifetime of hard work or suddenly came into it via a business exit or inheritance, one of the most common questions within the ultra-high net worth space is what is a family office, and do I need one? A family office is an organization that assumes the day-to-day administration and management of a family’s personal and financial affairs. Though investment oversight is a significant component of their responsibilities, what differentiates them from traditional wealth management firms is all the additional services that they offer.  Having a family office allows the affluent to rely on a team of objective subject matter experts to oversee all the critical aspects of their lives so that they can focus on what really matters to them.

1) What services do we require?

• Investment Management & Oversight
• Manager Selection & Due Diligence
• Alternative Investment Access
• Aggregated Reporting
• Bill Payment & Bookkeeping
• Concierge & Lifestyle Services
• Tax, Legal & Insurance Coordination
• Family Governance & Education
• Strategic Philanthropy Advice
• Financial & Estate Planning

If you determine that you require more than 3 of the services on this list, chances are that a family office might be right for you. There may be services that you do not currently require but may need down the road.  Many families who are busy enjoying their wealth have not yet begun to think about estate planning, family governance, next-generation education, or strategic philanthropy but will probably need assistance in all these areas at some point during their life.  For this reason, it is important to evaluate a firm’s total platform and service offerings to make sure that they can handle both your existing needs as well as future ones.

2) Should we create our own Single-Family Office (SFO) or join a Multi-Family Office (MFO)?

Once you have decided that you need a family office, the next critical choice is whether you should form your own Single-Family Office (SFO) or join a Multi-Family Office (MFO). For most families, this decision comes down to your net-worth and the level of customization that you require.  Typically, a family with a net worth of $1 billion or more will choose to establish their own SFO, while those with between $25 million and $1 billion prefer to take advantage of the scale and shared cost structure of an MFO. Though it can be tempting to have an organization that exclusively looks after just your family’s needs, keep in mind that the cost of operating your own SFO can be deceiving.  By the time you factor in office space, technology, and several experienced professionals, it can easily be millions of dollars per year to support.  To keep costs down, many matriarchs and patriarchs serve as the head of their SFO.

3) What will it cost us?

A good rule of thumb is that a family should expect to pay about 1% of their assets per year to run their own family office. With a $10 million annual budget, a family worth $1 billion should have no problem setting up and running a high-end operation, where a $100 million family office would barely be able to afford one senior investment professional and office space with a $1 million. This is exactly why most families under $1 billion embrace joining a multi-family office as the cost savings associated with shared infrastructure, technology, and team, enables them to offer a larger team of domain experts at a price below 1% of assets per year.

4) Should we go with a large firm or a smaller boutique?

A popular industry joke is that if you have seen one ultra-high net worth family, you have seen one ultra-high net worth family. From the way each family amassed their wealth to the industry where they were successful to the way they spend money to the charitable causes they support; each family is truly unique and will require different services and support. There is a direct relationship between how custom an offering is and how much it will cost you.  As mentioned before, a single-family office will be 100% dedicated to its sole family but the costs, both monetary and your time, can be very high.  On the other end of the spectrum are family office services provided by large investment and trust banks.  Due to the sheer size and scale of their organization, they can offer these services at a low price, but this assumes that the client fits into their existing model with little customization.  For this reason, many clients choose to partner with a boutique MFO that can offer bespoke services at a competitive price.

5) How should we evaluate a Multi-Family Office (MFO)?  Questions you should ask:

• Compensation
  – How are you compensated?
  – Are you paid strictly for your advice or do you also get paid to sell products and/or accept soft dollar arrangements?
  – Are you bound by a fiduciary standard or are there conflicts of interest I should know about?
• Expertise
  – Can you tell me about your team?
  – What are their backgrounds and specific areas of domain expertise?
  – Who will we be working with on a day-to-day basis?
• Firm History
  – What is the history of your firm?
  – What is your ownership structure?
  – Can we please get a copy of your latest ADV?
  – Have you ever had any issues with the regulators?
• Clients
  – Can you please tell me what your other clients look like when it comes to net worth?
  – What industry backgrounds do they have?
  – Where are they based from a geographic standpoint?
• Privacy
  – How do I know that my information will remain private and confidential?
  – Can you walk me through your security protocols from a physical and cyber perspective?

If done correctly, a family office can enable you to truly enjoy the benefits that your wealth brings. In addition to conducting thorough due diligence on several potential firms, make sure you also enjoy working with them as you will be in constant contact with them. From adding new family members via marriage or birth to contemplating a new investment or business opportunity to considering a major purchase or charitable gift, your family office should always be your first call.

What are the private markets? What are the different types of private investments? How do private markets differ from public markets? What is the importance of due diligence?

The private market includes a variety of alternative investments such as private equity, private credit, and/or private real assets. The private markets differ as they are not listed on a publicly-traded exchange. The private market has grown almost three-fold over the past decade and globally, stood at $6.5 trillion at the end of 2019.(1) The demonstrable growth of the private markets can be attributed to many factors including the absence of regulatory burdens in the private markets, the massive liquidity that was created by nontraditional monetary policy over the past decade, the lack of daily volatility swings, and the extremely profitable IPOs of companies that were backed by private equity (e.g. Facebook, Alibaba, Salesforce). In fact, the number of private companies grew ~9% per year (from 2000-2018) while the number of publicly traded companies declined by more than 2% per year over the same period.

Some commonly known private market investments:

1. Private equity – The most commonly known portion of the private market is private equity. While select investors may invest directly into a private company, most investors gain access to private equity through a well-seasoned private equity fund and/or separately managed account. Typically, the fund is run by a general partner (GP) who gathers capital from investors and these investors become limited partners (LP). Examples of well-known private equity strategies include:
   — Buyout funds typically utilize leverage to obtain enough capital to acquire a controlling stake in a company. These companies are typically mature companies and the goal is to restructure the companies to become more profitable.
   — Venture capital funds invest small amounts in startup companies with the hopes of making outsized returns when the company matures. The funds typically carry more risk than other private equity funds. Most venture capital funds are either early stage where they are taking a bet on future growth (most of the time betting on an idea or intellectual property) or late-stage venture capital that may have the infrastructure in place but need help maximizing their earnings stream.
   — Growth funds typically invest in more mature companies than venture funds and carry less risk but a lower return profile as well. Typically, the companies they invest in are looking for expertise to make the business more profitable to potentially spin-off and/or look for merger candidates.(2)
2. Private credit – Private credit funds have grown substantially over the past two decades. One of the major contributors to growth in this space is that investors are desperate for income as yields in the public bond market remain near record lows. Private credit funds typically offer attractive yields as they lend to smaller companies that may be unable to access the public funding market at affordable rates. There are many areas within a company’s credit structure that private credit funds invest in and the level of return is highly dependent on the amount of risk associated with the debt in the fund. Some common private credit funds include:
   — Mezzanine and senior debt funds typically make loans to lower and middle-market borrowers as either senior or subordinate loans. The structure of the loans varies as senior loans may sit higher in the payout structure in the event of default while subordinated debt sits a bit lower (but still before equity ownership).
   — Distressed credit funds are funds that invest in the debt of distressed companies. They look for discrepancies between how the debt is pricing and compare it to the ultimate recovery rate in the event of default and/or the underlying value of the loans in the event of restructuring the company’s debt. This type of private credit can be highly speculative and dependent on expertise in bankruptcy laws and legal corporate structures.(3) These funds carry more risk than mezzanine or senior debt funds but also can offer a better return potential.
3. Real assets – Real asset funds access a variety of investments that carry the characteristic of having a tangible value. An investment is considered to have tangible value because there is something physical that backs it up. In addition, because it has a tangible value it is also expected to keep pace with inflation and some investors utilize it for a long-term inflation hedge. Some of the common types of real asset funds include:
   — Real estate funds are private funds that can invest in a pool of real estate offerings or into a direct real estate structure. Real estate funds vary across investments in office space, apartment buildings, warehouses and shopping malls. As with most private investments these represent long-term investments with capital locked up for different periods of time depending on the project. Investors are drawn to private real estate for its steady cash flow and historically negative correlation to publicly traded real estate investment trusts.
   — Infrastructure funds are private funds that may participate in a public-private partnership to spur infrastructure. The need for infrastructure is a global phenomenon. It is estimated that the world needs $3.6 trillion in annual spending for infrastructure. Given the limitation of government budgets to fill this void, there is always the need for public/private partnerships.(4) These types of funds may offer both capital appreciation as well as steady income.
   — Natural resource funds invest in companies that focus on the extraction, drilling, production and or refining of commodities, chemicals and/or timber. Since these funds invest in the physical commodity, chemical, etc. they are considered another way to hedge against inflation. These funds are long-term investments and carry risk as they are heavily correlated to the economic outlook.

How do the Private Markets Differ from the Public Markets?
There are advantages to investing in both the public and the private markets, especially for a well-diversified portfolio. Some differences investors should be aware of include.

• Barrier of entry: With the development of mobile apps and the increasing number of online brokers, the ability to invest in publicly traded stocks is open to nearly all Americans regardless of their knowledge or individual financial situation. However, in order to access the private markets, you must be classified as an accredited investor (e.g. high net worth individual).
• Reduced regulatory burden: Private companies are not constrained with regulatory hurdles and scrutiny like public companies. Regulatory filings, registrations, annual reports, and highly reviewed earnings reports are some of the items that cost money for public companies but not for private companies. A public company is sold to the public, so it is forced to accept more regulations. However, a private investment is typically sold to a smaller pool of accredited investors, and not required to adhere to the same regulatory environment.
• Daily volatility swings absent in private markets: Public equity markets have always been subject to daily price swings. However, in recent years these daily volatility swings have been exacerbated by algorithmic trading. Since private companies are not listed, investors do not have to see daily price swings or accept massive changes on frequent investment statements.
• Liquidity differences: Investments in the public market offer daily liquidity for investors that need to sell or want to buy. However, private investors are forgoing daily liquidity and willing to lock up their money for prolonged periods of time in exchange for the potential of a better risk-adjusted return.

Due Diligence is Crucial in Private Markets

The information to value a private company is not as readily available as it is for a public company that is forced to disclose financials, so the due diligence process is more complex and even more important in the private markets than in the public markets. The efficient market hypothesis states that a publicly-traded company should reflect all available public information. It should be a fair playing field for all investors because anyone can obtain the same public information. However, that is not the case in the private markets. It takes deeper due diligence and market analysis to determine the appropriate value of the private investment and the price a buyer may be willing to pay for it in the future. An example of the importance of due diligence is evident in the dispersion between returns in the public market and compare it to the private market. Over the past 10 years those investors that invest in a publicly-traded equity manager saw a very narrow dispersion in the returns (10.3% for best managers and 7.8% for worst managers). This is because all managers had the same information. However, you can see the dispersion in returns between the best managers in the private equity space (20.1%) compared to the lowest quintile managers (1.9%).

Private Investments can add to a Well Diversified Portfolio with Less Volatility

Volatility in public equity markets is typical and should be expected by investors throughout any long-term investment cycle. However, the violent daily swings that investors have had to absorb this year brought back memories of the Great Recession. In addition, a traditional portfolio of stocks and bonds has not recently been offering the same diversification benefits as it may have historically offered. This is because the Federal Reserve has been a more prominent player in the public bond markets resulting in bonds not pricing in underlying fundamentals, instead, prices are manipulated by the Fed purchases. In addition, artificially low interest rates result in excess risk-taking and may drive equity prices higher than fundamentals warrant. Therefore, it is important for investors to look at alternative ways to add diversification to their portfolios. The private markets not only offer the potential for attractive long-term returns and diversification benefits but also less volatility for investors to absorb.

The Bottom Line

Taking advantage of the private markets through a less liquid investment can provide investors with the ability to generate excess returns over time and eliminate the stress of daily price movements of a public security that may have no fundamental impact on the actual value of the business. In an environment where finding value in the public equity and bond markets is starting to entail taking on more risk, the private markets look even more attractive. In addition, the demand for good quality private investments has had investors chasing too few deals in recent years. This can be seen by private equity funds coming into 2020 with $1.5 trillion of “dry powder” or money that can be deployed.(5) However, the market conditions and dislocations over recent months have resulted in attractive opportunities for that massive amount of money to be deployed and history suggests that private investments can outperform public investments at the turn of an economic cycle. While every client’s financial situation and investing goals may vary, the ability for a wide array of investors to access the private markets through different structures is growing. Therefore, we will continue to look for attractive private investments that offer our clients the opportunity for a good risk-adjusted return, can enhance income opportunities, and offer attractive diversification benefits.

As always, if you have any questions about our perspective, please do not hesitate to reach out to your advisor.

1. Mckinsey Global Private Markets Review 2020 – A New Decade for Private Markets. McKinsey and Company, February 2020. Three times estimate comes from the Mckinsey report and is as of 2010.
2. Private Equity Interviews: The Official Guide. Published by Andrew Chen.
3. Private Credit Strategies: An Introduction. Cambridge Associates. September 2017.
4. Mckinsey Global Institute, JPMorgan Asset Management, Data as of May 31, 2020.
5. Private equity has $1.5 trillion of unused funds and is looking to raise more. Fortune magazine. January 2020.

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