Private sector retail transformation: Key factors spurring evolution
The world of private markets is experiencing a significant shift, with retail investors playing an increasingly crucial role. According to a recent survey, 97% of asset management professionals report strong or moderate interest from retail investors in private funds [1]. This trend is driven by several factors, including the search for alternative investments and the potential for higher returns.
Private market funds have outperformed public equities in every vintage year by an impressive 1,079 basis points [1]. This stellar performance, combined with the growing interest from retail investors, is expected to expand access to private equity, venture capital, and private credit funds over the next five years. This could potentially increase overall private market Assets Under Management (AUM) to $60 trillion by 2032, largely due to retail inflows [1].
However, this shift also presents challenges. Different expectations and requirements of retail investors, such as real-time data access, streamlined onboarding, and transparent communication, are areas where many midsized firms are unprepared [1]. Regulatory and legal risks, particularly for 401(k) plans, where fiduciaries may face liability for including private assets that retail investors might not fully understand, are also concerns [3][5].
Potential conflicts and impacts on institutional investors are another challenge. These include dilution of institutional stake in funds, reduced access to co-investment opportunities, and possible reorientation of general partners’ business models toward retail investors due to higher fees and lower engagement from retail vs. institutional capital [2][3]. Transparency and fund structure concerns are also prevalent, with institutional investors wanting caps on retail capital in funds to preserve allocation and terms, as well as clarity over capital sources [2].
Despite these challenges, the retailization of private markets is expected to make private markets a larger, more democratized component of many investors' portfolios. This could increase competition and fundraising dynamics, with GPs potentially favoring retail capital for its fee benefits. It could also create new operational and regulatory compliance demands for fund managers [2][3].
The potential for higher returns is the primary motivator for retail investors' interest in private funds, cited by 64% of respondents [1]. Private equity is the most popular asset class among retail investors, with 67% interest, followed closely by real estate, with 55% interest [1]. Risk management is a significant factor for retail investors, cited by 47% of respondents [1].
Technological innovation and regulatory evolution are responses to the challenges in private markets. The European Long-Term Investment Fund (ELTIF 2.0) is an initiative aimed at increasing accessibility for retail investors in private markets [6]. Improved technology platforms are expected to accelerate the transformation of private markets [4].
The Global Custodian research report, Leading the shift: Transforming private markets in a retail-driven landscape, provides in-depth insights into the focus of retail investors on private markets [7]. Lower minimum investment thresholds are expected to contribute to the transformation of private markets [4].
In summary, the retailization of private markets presents transformational growth opportunities but also significant structural, operational, and regulatory challenges that will shape how private capital is sourced and managed, influencing the broader investment ecosystem through 2030 [1][2][3][5]. Liquidity concerns continue to present challenges in private markets, but with the right strategies and regulations in place, the future of private markets looks promising for both institutional and retail investors.
[1] Global Custodian Research Report, Leading the shift: Transforming private markets in a retail-driven landscape [2] McKinsey & Company, The retailization of private markets [3] Preqin, The impact of retail investors on private markets [4] KPMG, The future of private markets: A retail-driven landscape [5] Willis Towers Watson, The rise of retail investors in private markets [6] European Commission, ELTIF 2.0: Increasing accessibility for retail investors in private markets [7] The Global Custodian, Leading the shift: Transforming private markets in a retail-driven landscape
Asset management firms are exploring private markets more extensively due to the strong interest expressed by retail investors in private funds, aiming to capitalize on the potential for higher returns. This shift towards private markets is expected to boost overall Assets Under Management (AUM) significantly, reaching $60 trillion by 2032, primarily driven by retail inflows.
Technological advancements and regulatory initiatives, such as the European Long-Term Investment Fund (ELTIF 2.0), are being developed in response to the challenges posed by the retailization of private markets, with the goal of making private markets more accessible to retail investors.
