It is estimated that $68 trillion will be passed down from baby boomers to their children in the coming years – the largest intergenerational wealth transfer in history. And with the rise of private markets, a significant portion of this wealth is likely to take the form of private assets, such as venture capital and private equity.
For those tasked with preserving this wealth for future generations, private assets can offer a number of advantages. First and foremost, they tend to provide a higher return than traditional public investments like stocks and bonds. But beyond the “liquidity premium” associated with these assets, there is also a “complexity premium” that comes with investing in them.
This added complexity can be both a blessing and a curse when it comes to preserving wealth for future generations. On the one hand, private assets can offer greater protection against inflation and market volatility. On the other hand, they are often illiquid and subject to complex tax rules.
Where Liquidity Issues Come From
While private assets can offer a number of advantages for wealth preservation, they also come with certain liquidity challenges. One of the most common is the complex structure of private equity funds, which can make it difficult to access capital when needed.
This difficulty is often compounded by the fact that many PE funds have a “lock-up” period, during which investors are not allowed to withdraw their capital. This lock-up period can last for several years and makes it difficult to plan for liquidity needs in the future.
One of the most commonly cited GP-led liquidity solutions is the GP-led secondary fund restructuring. In this type of restructuring, the GP creates a new fund that acquires the interests of existing investors in the old fund. This provides investors with liquidity while also preserving their original investment.
How Alternatives Improve Wealth Transfer Outcomes
As explored in a Bernstein report, alternative investments can play an important role in estate planning and wealth transfer. They offer the potential for higher returns, lower volatility, and a lower probability of a significant loss. For these reasons, they can be an excellent way to transfer wealth while preserving its value.
In addition, alternative investments offer the opportunity to add value beyond investment returns. The exclusion amount, also known as unified credit, refers to the total gifts and estate transfer exempted from taxation. When an asset with high growth potential is transferred while its value is low or discounted, the exclusion amount can be retained and applied to other gifts. This can potentially result in significant tax savings for the donor.
Why a Platform is Needed
Fortunately, there are a number of ways to address liquidity challenges and ensure that your private assets are passed on to your heirs in a seamless manner. One of the most important is to work with a platform that specializes in managing private market investments.
A good platform will help you navigate the complex world of private markets and ensure that your assets are properly structured for estate planning purposes. It will also provide the added benefit of liquidity, which is often lacking in private market investments.
When making direct investments into individual funds, the investor or their heirs would need to work directly with the fund GPs to help facilitate a transfer. This can be difficult and time-consuming since GPs are primarily focused on ensuring the success of their portfolio companies and finding new LPs.
When allocating to funds via a platform like Gridline, the investor is investing in a Gridline security. This makes it possible for Gridline users to connect with each other and trade securities, rather than have to go directly to the fund GPs.
With the help of Gridline, you can confidently invest in private assets, knowing that you have a partner who is focused on preserving your wealth for future generations. Agreements made on Gridline are actively managed and tradable, meaning your assets can be passed on seamlessly to your heirs.
The Bottom Line
For many wealthy families, alternative investments offer the perfect opportunity to transfer wealth while preserving its value. By investing in high-growth alternative assets, donors can reap the benefits of both higher returns and lower taxes. In today’s world of intergenerational wealth transfer, alternatives provide a unique and powerful tool for preserving family wealth.