Exploring the Shift Toward Retail Investors in Private Equity
Private equity funds have been the domain of institutional and high-net-worth investors, who have the ability to navigate the complexities involved in private companies. In early 2023, private equity firms had?a substantial presence in the retail market as evidenced by recent trends. This movement is a new page in the investment?world, offering individual investors entry to opportunities which was once inaccessible. Here, we have covered the?evolution of private equity, what is pushing them to penetrate into the retail market and any implications (positive/negative) of such a course on the investors and the industry.
Understanding the Private Equity World
Private equity for retail investors is also defined as the investment in private?companies or assets pooled in funds. These are higher risk investments?with longer investment horizons than traditional public markets, but provide for high potential return investments. Private equity firms?tend to buy companies, improve their operation, then sell them for a profit, a process that can take years. The global equity crowdfunding market size was valued at over $11.4 billion in 2020 and is expected to grow at a?compound annual growth rate (CAGR) of $42.3% by 2028.
The Shift Toward Retail Market Expansion
In?2012, the United States enacted the JOBS Act, allowing companies to publicly solicit investors and thereby reach a wider pool of potential investors. Now, private equity funds can offer these investments to higher net worth?individuals and retail investors too, and that's allowed for a new frontier in the world of private equity investment.
The rise of tech has also played a role in the shift. The democratization of private?equity investment — allowing ordinary people to invest in private equity similar to public equity through online platforms — was a key driver. Crowdfunding platforms such as?SeedInvest, Wefunder and Republic offer individuals the ability to invest in startups and private companies with lower minimums, often beginning at $100. Some of them even enable your investment in these grounds with a smooth process ranging from browsing opportunities to doing due diligence and?investment. In fact, in 2020, there were nearly 50 equity crowdfunding platforms in the U.S., compared with?about 20 in 2015.
With concerns around continued?market volatility and the poor performance of traditional asset classes, investors are turning to alternative investments for diversification. Private equity has attracted the interest of retail investors because it promises a potentially?higher return profile and lower correlation with public market swings. A proliferation of private equity funds?dealing, often through one of these new platforms, retail access to private equity investments.
As competition among private equity firms increase, more?and more firms have the motivation to bring in retail investors. Realizing that widening the field of available investors and exposing them to?smaller investment opportunities is profitable for those firms they wish to capitalize on billion-dollar investments, they are bringing forth to market and focusing direct attention and marketing towards retail investors.
How Can?Retail Investors Get Access to Private Equity?
Here are some approaches that let retail investors participate in private equity and bring huge opportunities along with certain challenges.?
Equity crowdfunding Platforms have emerged as a means for retail investors to participate in private equity investments?in individual companies. These platforms enable users to invest small amounts of money into startups and growth?companies for equity. Some examples are?Seedsinvest, Wefunder, and Republic. Investors can explore different offers, look over profiles on a company, and participate?in multiple funding rounds.
The minimum investment required by certain private equity funds?is being reduced in order to open the asset class to retail investors. Traditionally, these funds demanded large capital commitments, often in the low hundreds of thousands?or even millions of dollars. Today, some funds charge minimum investments of $5,000 to get in, allowing you to invest in?private equity for peanuts.
A third approach for retail investors to access private equity fund structure is to invest?in public private equity firms. These companies act like traditional investment firms?and put money into a range of private equity transactions. Retail investors can indirectly profit off of the private equity investments of these companies by buying shares, but without the hassles of being a?direct participant. Private?equity firms that are publicly traded have done well, with the arrival of retail investors chasing the strong performance of these firms. On average, they have generated roughly a 15% compound annual return over the last 10 years.
There are a few ETFs dedicated to private equity or related sectors,?providing retail investors the opportunity to diversify into private equity investments. These funds target publicly traded companies that conduct private equity operations, allowing retail investors an easier, more liquid way?to access this unique asset class.
Implications of Retail Market Expansion
The expansion of private equity into the retail market makes unique private equity investment opportunities?available to individual investors that otherwise would be limited to institutional players. This?opening up of investment creates for a more equal wealth reality.
Some more key implications are:?
Conclusion
Private equity's gradual entry in retail is a major event in the investment landscape. As regulations evolve, technology advances, and alternative?investments grow, retail investors now have access to private equity like never before. This empowers everyone with the tools to participate in?financial markets, thereby creating a more competitive and inclusive financial ecosystem. The rise of private equity fund structure is a market reality that will remain. It challenges both investors and firms alike will need to?adjust to these changes both to the unique opportunity and the risk profile these investments bring.?