Adviser due diligence in private markets ‘essential’ as sector continues to grow

With private markets continuing to gain momentum among financial advisers, due diligence in this space is more vital than ever.

According to a new Netwealth report, private markets are “no longer optional”.

“Platforms are scaling access, and client appetite is surging,” the firm said.

However, as private markets grow, so does the risk for advisers, particularly when it comes to transparency and due diligence. Netwealth’s research suggests that the performance gap between the top 25 per cent and bottom 25 per cent of managers in global equities is just 1.6 per cent.

In contrast, in US private equity and venture capital, the same top 25 per cent to bottom 25 per cent spread can be as high as 19 per cent.

“In other words, selecting the wrong manager and landing in the bottom quartile exposes investors to significantly greater underperformance,” said Netwealth.

“That’s why due diligence is non-negotiable for advisers operating in private markets.”

Paul O’Connor, head of strategy and development – investment choice at Netwealth, added: “As private markets become a core part of client portfolios, advisers need robust resources to deliver enduring value and foster loyalty.”

Netwealth suggested several steps to ensure quality:

- Governance and team stability – Know who’s steering the ship

- Manager quality – Look beyond glossy pitch books to real performance

- Transparency – Uncover what managers aren’t telling you

- Performance and valuation – Test if returns are repeatable and risk-adjusted

- Fees – Understand every layer to avoid hidden costs

Heath Ueckermann, partner at Lipman Burgon, said that his firm has conducted advanced due diligence through building an “internal research team to lead due diligence and maintain governance frameworks”.

Demand for private markets is accelerating, Netwealth said, but investor understanding is “largely low”.

“In fact, 62 per cent of new clients say they want advisers to ‘empower me with the knowledge and tools to make decisions’,” the firm added.

According to Viola Private Wealth executive chair Charlie Viola, in order to deliver a compelling private market offering, advisers need to start with suitability.

“Show it to everybody, then work out which clients absolutely should have it,” he said.

Speaking on the ifa show earlier this year, Viola also highlighted the opportunities afforded by private markets.

“There’s only so many CBA and BHP shares that you want to own,” Viola said at the time.

“As a result, we wanted to make sure that we were giving clients access to different types of investments, generating their returns in different ways and making sure we were generating revenue for clients especially through the cycle.”