Retail Distribution within Private Markets

The Final Frontier?

“Retail is the final frontier for private capital fundraising.” This sentiment has been top of mind for many of the largest private asset managers, as macroeconomic shifts point to a new era of fundraising opportunities. Individual investors represent about half of global wealth, but have vastly different investing behaviors than institutions. The further down the wealth channel you go, individual investors tend to favor greater liquidity, brand name assets/managers, and smaller minimum investment sizes. The Mass-affluent to Affluent market, representing accredited investors and qualified purchasers represents a $23T pool of capital. The greatest generational wealth transfer in history is also beginning, transferring $70T of wealth from more conservative and pragmatic generations to younger investors with new investment behaviors. Individual investors today have allocated, on average, less than 5% of their portfolio to private markets, despite broad demand to increase allocations to 15-20%. A recent Moonfare report stated that 40% of individual investor respondents cited illiquidity in private investments as the main barrier to investing in private markets. To accommodate, asset managers will need to shift both capital deployment and regulatory structure of investment vehicles to attract this new segment of investors.?

Retail Investing Behaviors

An internal study conducted by Cadre (acquired by Yieldstreet, 2024), indicated that individual investors made investment decisions based on the following three factors, in order of importance: 1. Brand name (asset manager or company), 2. Asset Class, and 3. ROI. Digital investment apps like Robinhood have conditioned new investors to prefer liquid, brand name investments over asset class or higher ROI. The retail channel is driven by different investment incentives than both institutional allocators and investment advisors, which is a key consideration for private asset managers to make when accessing this new channel. In the near term, there exists strong incentive alignment between the largest name brand asset managers (ie. Blackrock, KKR, Apollo) and retail investors. The largest asset managers have the highest demand for new sources of capital, driven primarily by shifts in institutional allocations to the middle market to access higher returns. Retail investors, who have been conditioned to invest in brands that they know and love, (ie. Apple, Microsoft, Tesla) are attracted to private asset managers with strong name-brand value. This creates the perfect alignment of incentives for the retail adoption of private market investing.?

Tapping into Existing Distribution Networks

Brokerage platforms like Fidelity, Robinhood and Sofi have built up user bases of millions of investors, by providing an intuitive investment experience. Over the next few years brokerage platforms will adopt private market products, which have higher margin potential for brokerages. Billions of dollars have been spent by brokerages in acquiring customers and providing both a sticky and trusted consumer experience for investing in public markets. Brokerages represent the perfect sales intermediaries for asset managers looking to expand capital raising efforts into the retail channel. However, investors on brokerages have become conditioned to expect greater access to liquidity than existing private fund vehicles provide.?

Asset managers will need to adopt new kinds of investment vehicles to attract this new investor segment, beyond private drawdown funds which can have holding periods of 5 to 12 years. Current trends in the RIA space show that private asset managers are willing to shift behaviors to attract new kinds of investors. 40-act registered interval or tender offer fund products have been used to attract allocations from the accredited investors in the RIA channel through intermediaries like CAIS and iCapital. Despite the higher cost of a registered 40-act interval fund, which has higher reporting burdens than a private drawdown fund, asset managers are willing to front that cost to access new sources of retail capital. However, even 5% quarterly redemptions is not enough to attract investors further downstream. In addition, liquidity provided at the fund level (ie. quarterly redemptions) lowers fund returns, as asset managers are forced to maintain liquid equities or cash to meet redemptions. In order to bridge this gap, the industry will need to adopt robust secondary market trading infrastructure, and adapt new investment vehicles to accommodate daily liquidity. In addition, to streamline distribution and reconciliation of investor positions, managers will need to adopt a digital process for KYC/AML, fund admin, tax reporting and position management within their funds.?

Behavioral Changes Amongst Asset Managers

Adaptation to the retail channel will also force behavioral changes in the investment strategies of asset managers. Managers will focus more on rapid capital deployment, which will require greater allocation of resources towards deal sourcing and diligence. However, because funds will be able to tap into a low cost distribution network through traditional brokerage platforms, sales and marketing efforts will require less internal resources. Currently, sales and marketing are one of the highest COGS for asset managers, driven primarily by personnel costs. Private market asset managers will be able to dramatically decrease distribution costs by tapping into the robust infrastructure built for public market distribution. In order to minimize cash drag in registered products, managers will be required to focus on co-investments, and secondary strategies. Targeting middle market managers will enable larger asset managers to access higher ROI generating co-investment or secondary opportunities. The largest brand name asset managers may eventually serve the function of middle market index funds, raising retail capital and deploying into middle market strategies and funds as trusted intermediaries for retail investors to access private market returns.?

Overall, the largest asset managers in private markets have the opportunity to capitalize on their strong brand names, by adopting new strategies to raise and manage retail capital. Driving forward adoption and growth within private markets.?