Funds Europe – But the market hasn’t taken off as well as it might have done?
Degosciu – There is more than $240 billion in market cap, but compared to the total private equity market, it’s still niche. Our clients are 90% institutional investors. There are ETFs – but even there, 90% are institutional investors. We are still at the beginning of this asset class.
Allright – In the US, certainly a large number of the big private market participants are now partnering with groups to allow retail investments, via the RIA [Registered Investment Advisor] network. There’s lots of tech companies popping up to support that. It’s very different from when you might have 100 investors into a fund and being able to support that seamless onboarding experience.
Some other challenges around retail markets are with liquidity matching.
The high-net-worth and retail market are just where all asset managers are looking to grow their presence; private markets is just another area that diversifies portfolios to hit investment objectives.
Nicoll – We have a very large retail and wholesale business already. The challenge is to educate that daily liquidity is not the be-all and end-all. Things like Eltifs and various other things are gradually changing the market and changing views.
Institutional investors have also grown up with the idea of the J-curve in private equity. Wholesale and retail investors are not used to it. The advent and growth of a secondary market will help democratise the asset class as people can enter and start getting immediate returns, even if they’re slightly lower than they would expect. You don’t have the same patience in the wholesale market as the institutional market.
Tidswell-Norrish – Typical private equity firms of scale today have circa 5% of their commitments from individuals, and [going by some articles] they’re looking to increase that number to anywhere between 30% and 50% over the coming five years. The size of the market is enormous, touted as being two times the size of the institutional opportunity for GPs, and there are a number of tailwinds underpinning that growth from generational wealth transfers, through to digitisation and the adoption of financial technology.
Secondary markets will be critical for the retailisation to take form fully, but there’s so much that financial technology can do around creating lower entry points, easier ways to do capital calls and distributions, consolidated reporting and transparency.
We take for granted the education that’s been done on public securities with the advisers. An important issue for distribution platforms of alternatives is education. The benefits of absolute risk-adjusted returns could provide much opportunity and solve challenges over coming decades.
Nicoll – If you end up with private assets being transferable – which is a necessary step to do this – there’s no reason why liquidity doesn’t follow transferability. We own private assets that are £1 billion/$1 billion in size, so the idea that somebody wouldn’t want to make a market in that would be odd.
Additionally, if you set up something that is basically a shadow market, it could either be regulated out of existence far too early, or you end up with something that is so ‘Wild West’ that it creates poor investor outcomes. There are complexities, but it would be odd if you didn’t have a completely fundamentally different way of investing and a different set of choices than you have now.
Degosciu – I fully agree that private markets can help in solving problems that pension funds face, but from a regulatory perspective something else must change because currently there are assets, like bonds, that are classified as risk-free by the regulators. Young people today have to invest more in risky assets because they have 20, 30, 40 years’ time to make returns. This has to change, but it has to be a political discussion.