Private markets have long been a territory reserved only for large institutional investors and the super wealthy. Individuals have faced a labyrinth of barriers to entry, including operational, financial and regulatory challenges, as well as a lack of appropriate investment vehicles. While some of these persist, things are changing. With strong performance in recent years, continued inflows of capital and exciting, fast-growing firms choosing to stay private for longer (and going public at much higher valuations), the size and appeal of the private equity universe continues to grow. Its promise of resilience and returns amid volatile public markets have thrust the asset class into the limelight, and access is opening up to private investors – a largely untapped pool of capital.
In particular, demand from high- and ultra-high-net-worth investors is expected to drive the ‘democratisation’ of the asset class. A recent survey of wealth managers by the Investment Association and Goji Investments cited diversification (84%), performance (63%) and income/yield (58%) as the key drivers for investing in private assets on behalf of their clients.
By 2025, the global private equity market is set to more than double in size, with individual investors expected to increase their capital commitments to PE funds at a CAGR of 18.8% by 2025 to an absolute number of $1.2 trillion, significantly outpacing institutional growth, according to analysis by BCG. It’s a shift that will not only change how GPs operate, but also affect traditional Limited Partners with concerns voiced about investing alongside new investors that may be unfamiliar with the asset class – the fee structures, the liquidity profile and the capital calls – and who will likely have different investment goals.
How will an influx of retail investors change private markets?
A mere 1% increase in allocation by high-net-worth individuals would increase the size of private markets by 10%, according to Hamilton Lane. But inefficiencies and manual processes continue to make it difficult for the ‘alternatives investing’ space to scale up to bring in new investor groups.
The increase in demand for private assets from individual investors is set to accelerate:
- The digitisation of private markets – To build a successful private market investment programme that reaches deeper into the DC pensions, private wealth and retail markets, agility and scalability is key.
- This will be facilitated by fintech platforms than can provide the right systems, technology and processes, removing operational headaches and taking a load off of intermediaries and investors. Platforms like Goji, Moonfare and iCapital Network will continue to drive access and efficiency in private markets investing – be it through connecting asset and wealth managers to fund managers, breaking down barriers with low minimums, scaling the onboarding process or offering a digital investment journey from automated onboarding right through to online reporting.
- Investing in private assets is a global game, with a fund domiciled in one country, the fund manager in another, and investors spread across the globe. Here, digital platforms for private markets investing can serve as educators, helping asset managers and fund administrators keep investors abreast of the evolving regulatory requirements of various international jurisdictions.
- The emergence of appropriate fund vehicles and innovative structures that broaden access to private markets.
- The European Commission has proposed making the European Long Term Investment Fund (ELTIF) structure more accessible and attractive, by removing minimum investment and wealth requirements for individuals while also broadening the type of assets fund managers can hold.
- The new Long-Term Asset Fund (LTAF) regime in the UK seeks to make private capital more accessible, while addressing liquidity mismatches that have historically plagued open-ended funds.
How can retail investors be educated and how big are the challenges of liquidity mismatch?
To avoid a mismatch between investor expectations on liquidity and the actual liquidity of the assets, fund managers, administrators and advisors must help the investor to understand:
- The illiquid and long-term nature of these assets, contextualising the level and type of risk illiquidity actually presents.
- The illiquidity premium attainable when you take impulsive decisions based on market volatilities out of the equation and focus on long-term goals.
- The role of these illiquid assets in diversifying a broader portfolio and moderating risk.
What are the regulatory challenges?
While the lowering of regulatory hurdles and emergence of long-term fund structures are key to easing investor access to private markets, further regulatory updates may be required for them to really take off. For example, distribution of the LTAF is currently restricted by the Financial Conduct Authority’s rules. Additionally, regulators must ensure fluidity of any new frameworks or regimes so that they are congruent with the rapid pace of technology and innovation, and applied in the way that was originally intended.
As governments increasingly recognise private capital as an important driver of economic growth, regulation around holding private assets is likely to loosen. Regulators will need to balance any easing of rules with closer scrutiny of private asset funds – something that should be made easier if the influx of retail investors prompts greater standardisation of fee structures and returns, and as a result transparency.
Dealing with a whole new set of investors
- Amid their aggressive pursuit of new investor groups, we’ll see PE firms increasingly invest in their own retail investor/private wealth units, comprising teams of specialists focused on designing and marketing alternative investment products to these investors, and that can help their advisors better understand the ins and outs of private market investing.
- A willingness from retail investors to invest side-by-side with more professional, experienced private asset investors will give rise to opportunities for co-investment.
- As they become more sophisticated, retail clients will account for a larger share of fundraising for private investments. With a new generation of investors focused on the impact of their investments, the industry could see a shift in bargaining power to these Limited Partners.
Private markets’ golden age looks set to continue, but the pace of democratisation will be determined by macro factors, the changing regulatory environment and digital innovation. Technology will continue to catalyse the democratisation of private assets, offering the toolkit needed to navigate the tricky investment landscape with a friction-free experience. Meanwhile, regulatory intervention will see the proliferation and refinement of options for accessing the space, enabling supply to catch up to demand. To catch the upside, private equity funds should – with the help of technology – collaborate as much as possible with intermediaries and investors, educating them and sharing data to engage and retain their new partners.
With thanks to BackBay Communications for their contribution to this article.
For more exclusive insights from industry experts, be sure to join us at SuperReturn International >>