Democratisation of Private Assets for Retail Investors

Over the past few years, there has been a growing call for democratising private markets. Traditionally, only institutional investors and the ultra-wealthy have had access to asset classes within private markets, which often yield superior and uncorrelated returns compared to public Cliquez ici pour entrer du texte.markets (1).

However, vast segments of the investor community—including mass affluent individuals and 401(k) pension plans—have been effectively excluded from these opportunities.

At the same time, some of the world’s largest and most renowned private fund sponsors, or general partners (GPs), who are now publicly listed, have begun exploring ways to access this untapped capital pool.

In their pursuit of growth and increasing their assets under management (AUM), these sponsors see democratisation as a key avenue for expansion, providing an unprecedented opportunity to reshape private markets.

This article aims to understand the implications of democratising private markets, particularly for key financial sectors such as banks, insurers, and asset managers. Furthermore, we will examine strategic approaches that can help these organisations stay competitive and leverage the growing demand for broader investment options in private markets.  

Rationale for Democratisation

1. Market Trends

The democratisation of private assets in mass affluent retail is gaining momentum as several key market trends push investors away from traditional public markets and towards private investments.

One of the primary drivers behind this shift is the decline in the number of public companies. As fewer companies choose to go public, the variety of investment options available in public markets has decreased, leaving investors searching for alternatives (2).

On the other hand, private markets have become increasingly attractive due to their potential for superior returns and their ability to provide uncorrelated investment opportunities.

Unlike public markets, which are highly influenced by macroeconomic factors and stock market volatility, private investments can offer more stability and unique growth opportunities, especially in sectors like real estate, private equity, and venture Cliquez ici pour entrer du texte.capital (1).

Consequently, interest has risen leading to a push towards the democratisation of private assets in mass affluent retail, where individual investors, previously barred from accessing these exclusive asset classes, could now be granted more opportunities to participate.

With the expansion of access to private markets, investors are no longer restricted to traditional stocks, bonds, funds and ETFs. They can explore various options that were once reserved only for institutional investors or the ultra Expanding Investor Basewealthy.

This trend is reshaping the investment landscape and opening up new avenues for wealth growth among mass affluent retail investors.

2. Expanding Investor Base

In Europe, institutional investors such as pension funds and large asset managers have traditionally dominated the financial markets. However, there is a growing

opportunity to expand this investor base by including mass affluent individuals and high-net-worth individuals (HNWIs), which could unlock new sources of capital and further democratise access to private assets.

3. Unlocking Capital from Mass Affluent Investors

The mass affluent market with liquid assets between €50,000 and €1 million has become increasingly significant for financial institutions, especially retail banks (3).

This group, representing millions of individuals across Europe, is key for expanding the client base beyond institutional investors. Banks and wealth managers have started tailoring products to meet the needs of this demographic, such as personalised investment solutions and digital financial tools that enhance accessibility and engagement (4) .

4. The Role of HNWIs in Expanding Investor Opportunities

Meanwhile, the HNWIs (those with over €1 million in liquid assets) also grow in number and influence (5). This group already plays a crucial role in European wealth management. Still, their inclusion in private market opportunities is becoming more prominent as wealth management firms look to diversify their investor base. By tapping into both HNWIs and the mass affluent segment, financial institutions can broaden their capital sources and reduce their dependence on traditional institutional investors (6).

5. Regulatory Shifts Enabling Democratization of Private Assets

To achieve such expansion, regulatory changes like the European Long-Term Investment Fund (ELTIF) 2.0 are making private investments more accessible to retail investors, including the mass affluent.

This initiative allows retail investors to access new asset classes previously reserved for institutions, thus playing a significant role in democratising private assets in mass affluent retail (7).

Overall, expanding the investor base to include mass affluent and HNWIs could diversify funding streams and provide more individuals with access to high performing private assets, reshaping the landscape of European financial markets.

Challenges and Considerations

1. Administrative and Operational Burden

In the past, the general assumption was that securing a $200 million investment from a pension plan was far more efficient than managing the same amount split across numerous smaller investments (8).

Institutional investors, like pension plans, require fewer resources to onboard and manage because they bring significant capital in one go. This made them highly desirable for private market funds, as they simplified the administrative and operational processes of handling large sums of money.

However, with the democratisation of private assets in mass affluent retail, the dynamics are shifting. Now,GPs are increasingly dealing with smaller individual investments from the mass affluent and HNWIs.

While these investors are opening new capital streams, the process of handling numerous smaller investments brings an increased administrative burden. Each small investment requires its onboarding, reporting, and ongoing management, which can drive up operational costs.

To mitigate this, some funds may introduce surcharges on smaller tickets to cover the increased costs. Despite this, technological advancements are making it more feasible to handle these smaller commitments, which is why many GPs are actively pursuing this strategy (9).

2. Investor Capacity and Education

The democratisation of private assets for mass affluent retail and HNWIs faces certain challenges.

While HNWIs are interested in increasing their exposure to private markets, current market conditions—such as slower exit times from previous investments—limit their ability to make new commitments (6).

Without timely distributions from these exits, many of these investors have reduced liquidity, hindering their capacity to invest in new opportunities.

Another critical factor in democratising private assets is the education of new investors .

Private equity and alternative assets often lack liquidity and are subject to market cycles that can extend investment timelines. Therefore, educating new entrants about these dynamics is essential to help them make informed decisions and manage their expectations (10).

Without proper education, mass affluent investors might be unaware of the long term nature of these investments, the potential for volatility, or the need for patience with liquidity events. This knowledge gap could lead to dissatisfaction or poor decision-making.

Strategic Approaches for GPs

1.  Direct Targeting

In-House Programs

Advantages:

• When GPs build an in-house program to target affluent investors directly, they gain full control over the investor relationships. This allows them to cultivate long-term loyalty and trust.
• Additionally, owning these relationships can create more opportunities for GPs to build tailored products and services.

Disadvantages:

• Developing an in-house program comes with high resource demands. GPs must invest heavily in regulatory compliance, build a robust distribution network, and maintain an internal team that handles legal, marketing, and sales functions.

• This can stretch the firm’s resources and require a significant financial and operational commitment, which can be especially challenging for smaller firms.

2. Technological Innovations

Platforms like Gambit are revolutionising how investors gain access to financial markets. These platforms simplify investor onboarding enabling a smoother process of pooling smaller investments from mass affluent and accredited investors.

Such a platform can help maintain investor relationships by offering automated reporting and streamlined processes, reducing the administrative burden traditionally associated with private market investments.

Additionally, electronic subscription documentation is transforming how funds are raised by speeding up and simplifying the onboarding process. These innovations and automated reporting drastically reduce the administrative burdens for GPs, allowing them to efficiently manage a larger number of smaller investors without sacrificing compliance or transparency (11).

3. Regulatory and Structural Adaptations

Regulations often focus on ensuring that investors meet certain thresholds to participate in private markets, specifically targeting accredited investors and qualified purchasers.

These categories of investors must meet income or net worth requirements, demonstrating a higher level of sophistication and understanding of private markets. This helps protect both the investors and the market by ensuring that those participating can handle the risks involved.

GPs have begun exploring alternative investment structures to expand access while maintaining compliance. These include private business development companies (BDCs), interval funds, and real estate investment trusts (REITs), which can provide more opportunities for retail investors, even those not meeting the accredited investor criteria (12).

These structures are designed to improve accessibility while adhering to regulatory requirements.

Alternative Structures and Regulatory Frameworks

1. New Investment Vehicles

• BDCs, interval funds, and REITs are increasingly used to offer broader access to private markets (13).

• These structures allow non-accredited investors to participate, expanding access beyond traditional institutional investors.

• Initially focused on real estate, these vehicles are now popular in the private credit space, offering fixed-income returns and greater liquidity than traditional private equity (14).
  
  Regulatory Hurdles:

• These vehicles come with strict regulatory requirements, especially when compared to private funds.

• Launching a private BDC can take 18 months or more due to the need forstate-by-state regulatory checks (15).

• The time and resources required make these vehicles economically viable, primarily for GPs who are capable of scaling quickly and navigating complex legal frameworks.

Important Notice Regarding ELTIF 2.0 Updates

The European Commission has recently published the ELTIF 2.0 Regulatory Technical Standards (RTS) showcasing a more flexible and appealing option for retail investors. For more detailed information, you can refer to the official pages:

• BNP Paribas: ELTIF 2.0 Regulation
• EUR-Lex: Regulation (EU) 2023/606
  

Operational and Strategic Recommendations

1 Improving Distribution Channels

Traditionally, private banks have played a key role in interacting with these individual investors, helping to navigate complex discussions, comply with regulations such as MiFID, and offer digitalised services.

As the democratisation of private assets continues, these distribution systems need to evolve, providing access and investor education. Educating smaller investors about the risks, benefits, and nuances of private equity and alternative assets is vital to securing informed decision-making and long-term success (12).

2 Upgrading Operational Models

Asset managers must focus on upgrading their operational models to manage the complexities of dealing with numerous smaller investments. This includes investing in more advanced IT systems to streamline operations and improve data management (17).

Automation can help reduce manual workloads, ensuring more efficient investor communications and fund administration handling. Outsourcing tasks such as compliance, reporting, and transaction processing can reduce the operational burden.

3 Embracing Technological and Structural Innovations

Tokenisation allows the creation of digital tokens representing ownership in assets, which can be easily traded on secondary markets.

This innovation could simplify purchasing and transferring private assets, making transactions faster, more secure, and more transparent.

It could also lead to developing a secondary market for alternative assets, providing greater liquidity for investors who previously faced long lock-up periods (18)

Economic and Market Impact

1 Bridging the Funding Gap

Despite the need for capital in many sectors, such as green projects, new technology, healthcare, and fintech, funding isn’t flowing into these areas as expected. Financial organisations are often hesitant to invest in these risky sectors, particularly due to the current macroeconomic instability (19). European states, are constrained by significant deficits and a lack of private equity expertise, which hampers their ability to fund these projects effectively.

On the other hand, there are family offices (FOs), ultra-high-net-worth individuals (UHNWI), and even retail bank clients holding significant cash reserves, looking for diversification and higher returns.

The challenge is bridging the gap between these untapped cash reserves and the sectors that desperately need investment to grow. Successfully connecting these two groups is critical for unlocking Europe's economic potential (20). For example France’s recent policy: “Loie Industrie Verte” aims precisely at putting responsible investment at core of the saving strategies opening a new avenue of opportunities for mass affluent investors and enterprises (21).

The Role of Private Equity in Economic Growth

Private equity funds play a crucial role in directing capital from high-net-worth individuals, family offices, and mass affluent investors into sectors such as startups, early-stage companies, and small to medium-sized enterprises (SMEs). These types of investments can contribute to the development of key economic sectors and, by extension, support the broader real economy (22).

However, it is important to recognize that private equity investments also come with inherent risks. Asset managers, administrators, and distributors must carefully navigate these challenges by managing risks effectively, optimizing investment processes, and adhering to regulatory frameworks. Transparency and accountability are essential to ensuring that these investments align with the interests of both investors and the wider economic landscape.

Final Words

The democratisation of private markets provides new growth opportunities by granting mass affluent and facilitating HNWIs access to private equity and alternative investments. In doing so, both segments will be able to unlock potential higher returns and increase portfolio diversification by tapping into markets such as private equity or real estate.

It offers a way to unlock new capital while fostering economic growth. However, institutions must navigate challenges like regulatory compliance, increased administrative workloads, and the need for technological innovations.Financial institutions should adapt their strategies by upgrading technology, improving investor education, and embracing new investment structures. By

doing so, they can fully leverage the potential of democratised private markets and stay competitive in this evolving space.

Furthermore, the inflow of capital resulting from the democratization of private markets can be redirected towards the real economy and fuel essential initiatives in the green transition towards a sustainable future.

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