Private Markets Go Public: Why Retail Investors Are Breaking New Ground

There are several current movements within the private markets industry, however, in my opinion, there are three main market trends: the use of AI and Data analytics for deal value creation and internal efficiency, Cyber Security, across both the parent company and the portfolios they support, which is particularly pertinent with new AI technologies, and finally, the shift towards retail investment as an alternative capital raising source.

In this article, I will focus on the final topic, retail investment within private markets, why this is a growing market and the complexities it poses.

The Appeal for Retail Investors

Traditionally, private market investments have been institutional investor-led through capital raising rounds, and for various reasons, they have been “off limits” to retail investors.

Typically, a fund will have a minimum investment threshold. They have complex investment structures within long investment cycles and usually are based on close-ended funds, which restricts the ability to withdraw funds quickly if needed.

Nevertheless, due to various reasons, private markets are becoming more mainstream. Capital raising has been showing a slowing trend for a couple of years from more traditional sources. Regulatory changes, such as the LTAF and ELTIF 2.0, which aim to remove minimum investment requirements, or certainly reduce them, and broaden the scope of appropriate assets, have allowed for a larger target audience. There’s also increasing appetite from retail investors. The market is attractive due to the perceived resilience of the asset classes and their ability to outperform traditional assets in volatile markets, such as we’re currently experiencing.

That being said, there are still several changes that must happen for retail investment in the space to accelerate as has been predicted over the coming years.

Challenges of Scaling for Retail Investors

Retail Investor infrastructure must improve, along with the data governance that coincides with managing investments, to accommodate such a change. Typically, a fund could raise capital via a small handful of investors, but to raise the equivalent capital via retail investors, that number will have to rise considerably, posing issues with data governance, regulations and investor reporting. Maximising CRM efficiency from a sales perspective is also another issue many firms are grappling with, with the increased data capacity and investor relations required, to manage those new investor populations.

Many firms are also launching open-ended funds, or evergreen funds, which have no fixed term, allowing investors to withdraw funds if needed. This allows for greater flexibility and is appealing to most investors.

Another issue that many investors will likely face is the fact that private markets can be complicated and have a perceived lack of accessibility which breeds a lack of understanding. Historically these funds have been exclusively focused on investment professionals, who have a good understanding of the assets, and the complexities associated with them. Educating a new wave of investors is crucial to attracting and retaining that investment. Blackstone University is a good example of this in practice, providing education to investors specifically in private markets.

Opportunities for Mid-Cap Firms

The above is viable for large-cap firms, but may not be suitable for mid-cap businesses, much like marketing themselves to a new market. The average investor will not have exposure to the majority of firms, nor probably know they even exist! Large-cap firms will be able to market themselves to wider audiences through advertising and sponsorship, which is certainly a hurdle mid-cap businesses are considering, having spoken to business leaders regarding the topic.

There are however several solutions on the market, outside of the asset classes being available to investors via their traditional wealth manager or investment platform. There is a growing number of investment platforms that allow investors to invest directly in alternative markets, which also allows the fund to market itself to this audience and raise capital directly via retail investors, but without having to manage those investors directly.

Looking Ahead

We’ve been engaged on several mandates recently to secure specialist talent for private market firms, who understand this complex new landscape, are able to maximise existing infrastructure to ensure its retail investor friendly and capitalise on new technologies coming to market to increase efficiency within investor relations, to ultimately raise more capital.

I think this space will develop rapidly over the coming years, and it will be interesting to see which companies adapt quickest to overcome the potential challenges I’ve highlighted within this article.