The democratisation of private assets

By Cerulli Associates

The democratisation of private markets continues to gain momentum across Europe. The majority of investors in private markets have historically been pension funds, insurers, and other large professional investors, but an increasing number of opportunities are opening up to less sophisticated or less wealthy individuals as product innovation accelerates.

Large private market firms are increasing their resources in retail intermediary distribution and looking to develop innovative products. And a number of semi-liquid products in the market already target retail investors across Europe.

Some of these semi-liquid funds offer monthly or quarterly subscriptions and redemptions; others, such as investment trusts and ELTIFs, provide less liquidity. Exposure to private assets has often been limited by regulation in order to protect less sophisticated investors. However, that is changing rapidly, with new regulation increasingly opening private market opportunities to retail clients.

The EU’s European Long-Term Investment Fund Regulation is a good example of how a review of a certain regulatory framework can lead to the rapid uptake of private assets within retail distribution channels. Technology is another major factor contributing to the democratisation of private markets.

A number of fintech platforms such as Moonfare, iCapital, and Titanbay have emerged in recent years, offering opportunities for wealth managers and advisors and their retail clients to access private markets. Tokenisation, the process of converting private asset holdings into tradable digital securities, is another development in the market.

Partners Group’s tokenisation of its Global Value SICAV in Singapore is the latest frontier in the firm’s effort to make private markets more accessible to retail investors. The potential fractionalising of tokens could significantly reduce minimum investment size and open private markets to HNW and mass-affluent investors in the near future. This blockchain technology could give investors access to private assets for as little as US$1.

The inevitable democratisation of private markets

Tokenisation could also help to eliminate a lot of the paperwork and processing costs involved in creating private equity funds. Private market firms face significant costs when setting up new vehicles— some of these costs could be reduced significantly by using blockchain technology.

Despite the growing opportunities within retail distribution channels, Cerulli’s research shows that not all regions and investor types represent equal opportunities for asset managers. The European retail market remains heterogenous in terms of knowledge of and access to private investment capabilities.

For instance, HNW investors and their advisors remain poorly represented in the private asset base. Wealth managers and their HNW clients face significant headwinds when it comes to investing in private assets—challenges such as large minimum investments, illiquidity, lack of suitable products, and cumbersome processes.

Around half of the private banks and wealth managers Cerulli surveyed said that private asset products’ high fees and clients’ low risk tolerance are the major barriers to increasing their clients’ exposure to private assets. Lack of liquidity is another major factor preventing retail investors allocating more to private assets.

Private banks and wealth managers’ product preferences

Although European private banks and wealth managers’ appetite for private asset solutions is generally increasing, Cerulli expects some products and strategies to gather more interest than others. Our survey of private banks and wealth managers found that respondents will favour large market buyout and growth strategies over the next 12 months.

Around 40% of them plan to increase their allocations to large market buyout and growth strategies and around 60% will use external managers to do so. The independent (non-bank) financial advisors and independent wealth managers we surveyed will show even more appetite for these strategies than our private bank respondents. For example, 44% of independent (non-bank) financial advisor respondents plan to increase their allocations to growth strategies over the next 12 months, but only 30% of private bank respondents plan to do so.

Some regional differences exist, too. More of the private banks and wealth managers Cerulli surveyed in Italy and France anticipate increasing their exposure to growth strategies than in the UK or Germany. Infrastructure equity strategies are expected to attract significant interest in the private banking and wealth management channels over the next 12 months. More than a third (38%) of the private banks and wealth managers Cerulli surveyed anticipate increasing their allocations to infrastructure equity strategies over the next 12 months.

Swiss, French, and UK private banks are set be the major allocators to infrastructure equity, whereas German and Italian private banks are likely to show less demand for such strategies. German and Italian private banks will prefer infrastructure debt to infrastructure equity strategies: 40% of those we surveyed plan to increase their exposure to infrastructure debt in the next 12 months. Unlike other private asset classes, real estate debt will lose some of its momentum over the next 12 months.

On average only 23% of survey respondents plan to increase their exposure to real estate debt and around 19% plan to decrease their exposure to the asset class over the next 12 months, resulting in +4% net change. However, the private banks and wealth managers we surveyed are slightly more positive about opportunities within real estate equity market: around 34% plan to increase their exposure to this asset class and 12% are considering decreasing their allocations (a net change of +11).

Continue to explore the product structures and distribution channels alternative managers can leverage to address retail demand in Europe for private assets with our latest white paper and related research.