Industry

Why private markets see individual investors as the sector’s next growth engine

Sep 20, 2023

The denominator effect caused an initial wobble earlier this year for private markets as poor performance from stocks and bonds saw many funds hit up against allocation targets and scale back from alternatives – yet, institutional investors remain bullish on the asset class. Preqin expects private market assets to outpace global GDP and inflation, and BlackRock noted last week that its institutional clients were increasing private market allocations, which now top 50% in some quarters. 

But the industry is no longer tethered to institutional investors and most funds recognise that large investors aren’t the answer if they want to keep posting impressive increases in AUM (assets under management). The real growth engine for alternatives sits with individual investors.

This group holds 50% of global wealth but currently only accounts for 16% of the AUM of alternative funds. If we assume that successfully opening up private markets to individual investors will result in one fifth of private global wealth being attributed to alternatives, then democratising alternative assets has the potential to generate inflows of $17.2trn to private markets*. 

Source: Capgemini World Wealth Report 2022

Alongside sizable inflows, individuals also offer private market asset owners a differentiated source of capital. Close-ended funds haven’t even begun to tap into the potential of individuals. Existing, off-the-shelf funds could be distributed to this group, giving individuals access to high-conviction investment themes and proven strategies for the first time. Similarly, open-ended funds that provide individuals with a complete, diversified and predictable product would generate permanent capital for asset owners. In the case of special situations, such as single-asset or portfolio syndication opportunities, individuals could be a source of passive equity that carries a strong alignment of interest for a GP. 

The demand from individual investors is already booming, driving innovations across the board. The fintech sector, initially focused on opening up public markets, is now starting to address some of the barriers to private markets access, like distribution and illiquidity. Advisors too are sizing up the market for opportunities, a recent survey by the US Financial Planning Association found that 28% of advisors are already either seeking to or actively investing in alternatives for their clients, with diversification and risk mitigation their two most common drivers. 

That’s not to say that the switch from institutional to individuals is all plain sailing. The largest fund managers have already dipped their toes into the retail market – and in doing so highlighted many of the challenges this shift presents. Blackstone’s US Breit was the flagship for the investment firm’s charge into the retail world. It came unstuck at the tail end of last year when economic uncertainty prompted heavy redemption demands – despite solid performance – ultimately resulting in the gating of the fund. The retail fund’s semi-liquid structure just wasn’t compatible with an investor group used to the liquidity of the public markets. 


Getting to grips with a new way of doing things

The learning curve for funds trying to attract and service individual investors is steep. Managing large groups of investors with very different expectations, risk profiles and financial literacy requires a complete step change for many managers. 

Large investors might be familiar with the industry’s manual onboarding processes, but individuals certainly aren’t. Shaped by the public markets, these investors expect digital onboarding and speedy access to investment products – funds that can’t provide this simply can’t compete. Essentially, tech is fast becoming a competitive differentiator for those looking to attract individual investors. 

The handy flip side to this need for greater tech adoption is that it provides solutions to a couple of other pressing problems as well; scalability being the big one. Legacy systems designed to manage a small number of large investors don’t scale well when faced with an influx of individuals. Digitising parts of the investor management process – such as onboarding and capital calls – removes a significant amount of the administrative burden from fund managers and their distribution partners, enabling them to manage a growing number of investors more efficiently and cost effectively. 

Liquidity is the other big barrier to entry, and is the reason individuals haven’t cracked into private markets en masse (yet). Nearly half (48%) of advisors cite liquidity as their top concern around the use of alternatives for their clients. It's a problem the fintech ecosystem is all over, with innovations like secondary marketplaces and tokenization starting to pop up in various quarters. 

For funds, distribution and marketing is THE frontier that still needs conquering if they’re to embrace individuals. Gone are the days when relationships alone could grow AUM, now funds need to find new ways to create mainstream awareness for their products. Intermediaries are already helping to bridge this gap, and there are a number of platforms established in the market that offer individuals direct access to a range of alternative investment opportunities, but they’re still something of a niche offering.


The case for evolution 

Retail investors are the fastest growing private market segment, but their inclusion brings with it a whole new set of challenges. It is technology, with its ability to tackle these hurdles, that will provide funds with the tools they need to unlock the growth potential of individual investors.

The opportunities might be huge, but they’re not simply there for the taking. PWC estimates that 16% of existing asset and wealth management organisations won’t be around by 2027. As an industry, we’re hurtling rapidly towards a ‘make or break’ moment  – that 16% is double the historic rate of turnover.

The ability to attract, serve and retain individual investors then will be a determining factor in which firms thrive and which fall by the wayside. Embracing new technologies is a must, but doing it too quickly is as detrimental as not doing it at all. 

Technology is essential to opening up the private markets to individuals, but we need to understand our limitations and chart a measured path. That means new solutions that integrate with existing systems to support a gradual upgrade. Individual investors are the next major growth engine for alternatives, but bringing private market assets to smaller individuals is a marathon, not a sprint.


 *Hedgehog projection, uses institutional allocation as an indicator of likely long-term allocations for individual investors.



Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

Industry

Why private markets see individual investors as the sector’s next growth engine

Sep 20, 2023

The denominator effect caused an initial wobble earlier this year for private markets as poor performance from stocks and bonds saw many funds hit up against allocation targets and scale back from alternatives – yet, institutional investors remain bullish on the asset class. Preqin expects private market assets to outpace global GDP and inflation, and BlackRock noted last week that its institutional clients were increasing private market allocations, which now top 50% in some quarters. 

But the industry is no longer tethered to institutional investors and most funds recognise that large investors aren’t the answer if they want to keep posting impressive increases in AUM (assets under management). The real growth engine for alternatives sits with individual investors.

This group holds 50% of global wealth but currently only accounts for 16% of the AUM of alternative funds. If we assume that successfully opening up private markets to individual investors will result in one fifth of private global wealth being attributed to alternatives, then democratising alternative assets has the potential to generate inflows of $17.2trn to private markets*. 

Source: Capgemini World Wealth Report 2022

Alongside sizable inflows, individuals also offer private market asset owners a differentiated source of capital. Close-ended funds haven’t even begun to tap into the potential of individuals. Existing, off-the-shelf funds could be distributed to this group, giving individuals access to high-conviction investment themes and proven strategies for the first time. Similarly, open-ended funds that provide individuals with a complete, diversified and predictable product would generate permanent capital for asset owners. In the case of special situations, such as single-asset or portfolio syndication opportunities, individuals could be a source of passive equity that carries a strong alignment of interest for a GP. 

The demand from individual investors is already booming, driving innovations across the board. The fintech sector, initially focused on opening up public markets, is now starting to address some of the barriers to private markets access, like distribution and illiquidity. Advisors too are sizing up the market for opportunities, a recent survey by the US Financial Planning Association found that 28% of advisors are already either seeking to or actively investing in alternatives for their clients, with diversification and risk mitigation their two most common drivers. 

That’s not to say that the switch from institutional to individuals is all plain sailing. The largest fund managers have already dipped their toes into the retail market – and in doing so highlighted many of the challenges this shift presents. Blackstone’s US Breit was the flagship for the investment firm’s charge into the retail world. It came unstuck at the tail end of last year when economic uncertainty prompted heavy redemption demands – despite solid performance – ultimately resulting in the gating of the fund. The retail fund’s semi-liquid structure just wasn’t compatible with an investor group used to the liquidity of the public markets. 


Getting to grips with a new way of doing things

The learning curve for funds trying to attract and service individual investors is steep. Managing large groups of investors with very different expectations, risk profiles and financial literacy requires a complete step change for many managers. 

Large investors might be familiar with the industry’s manual onboarding processes, but individuals certainly aren’t. Shaped by the public markets, these investors expect digital onboarding and speedy access to investment products – funds that can’t provide this simply can’t compete. Essentially, tech is fast becoming a competitive differentiator for those looking to attract individual investors. 

The handy flip side to this need for greater tech adoption is that it provides solutions to a couple of other pressing problems as well; scalability being the big one. Legacy systems designed to manage a small number of large investors don’t scale well when faced with an influx of individuals. Digitising parts of the investor management process – such as onboarding and capital calls – removes a significant amount of the administrative burden from fund managers and their distribution partners, enabling them to manage a growing number of investors more efficiently and cost effectively. 

Liquidity is the other big barrier to entry, and is the reason individuals haven’t cracked into private markets en masse (yet). Nearly half (48%) of advisors cite liquidity as their top concern around the use of alternatives for their clients. It's a problem the fintech ecosystem is all over, with innovations like secondary marketplaces and tokenization starting to pop up in various quarters. 

For funds, distribution and marketing is THE frontier that still needs conquering if they’re to embrace individuals. Gone are the days when relationships alone could grow AUM, now funds need to find new ways to create mainstream awareness for their products. Intermediaries are already helping to bridge this gap, and there are a number of platforms established in the market that offer individuals direct access to a range of alternative investment opportunities, but they’re still something of a niche offering.


The case for evolution 

Retail investors are the fastest growing private market segment, but their inclusion brings with it a whole new set of challenges. It is technology, with its ability to tackle these hurdles, that will provide funds with the tools they need to unlock the growth potential of individual investors.

The opportunities might be huge, but they’re not simply there for the taking. PWC estimates that 16% of existing asset and wealth management organisations won’t be around by 2027. As an industry, we’re hurtling rapidly towards a ‘make or break’ moment  – that 16% is double the historic rate of turnover.

The ability to attract, serve and retain individual investors then will be a determining factor in which firms thrive and which fall by the wayside. Embracing new technologies is a must, but doing it too quickly is as detrimental as not doing it at all. 

Technology is essential to opening up the private markets to individuals, but we need to understand our limitations and chart a measured path. That means new solutions that integrate with existing systems to support a gradual upgrade. Individual investors are the next major growth engine for alternatives, but bringing private market assets to smaller individuals is a marathon, not a sprint.


 *Hedgehog projection, uses institutional allocation as an indicator of likely long-term allocations for individual investors.



Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

Industry

Why private markets see individual investors as the sector’s next growth engine

Sep 20, 2023

The denominator effect caused an initial wobble earlier this year for private markets as poor performance from stocks and bonds saw many funds hit up against allocation targets and scale back from alternatives – yet, institutional investors remain bullish on the asset class. Preqin expects private market assets to outpace global GDP and inflation, and BlackRock noted last week that its institutional clients were increasing private market allocations, which now top 50% in some quarters. 

But the industry is no longer tethered to institutional investors and most funds recognise that large investors aren’t the answer if they want to keep posting impressive increases in AUM (assets under management). The real growth engine for alternatives sits with individual investors.

This group holds 50% of global wealth but currently only accounts for 16% of the AUM of alternative funds. If we assume that successfully opening up private markets to individual investors will result in one fifth of private global wealth being attributed to alternatives, then democratising alternative assets has the potential to generate inflows of $17.2trn to private markets*. 

Source: Capgemini World Wealth Report 2022

Alongside sizable inflows, individuals also offer private market asset owners a differentiated source of capital. Close-ended funds haven’t even begun to tap into the potential of individuals. Existing, off-the-shelf funds could be distributed to this group, giving individuals access to high-conviction investment themes and proven strategies for the first time. Similarly, open-ended funds that provide individuals with a complete, diversified and predictable product would generate permanent capital for asset owners. In the case of special situations, such as single-asset or portfolio syndication opportunities, individuals could be a source of passive equity that carries a strong alignment of interest for a GP. 

The demand from individual investors is already booming, driving innovations across the board. The fintech sector, initially focused on opening up public markets, is now starting to address some of the barriers to private markets access, like distribution and illiquidity. Advisors too are sizing up the market for opportunities, a recent survey by the US Financial Planning Association found that 28% of advisors are already either seeking to or actively investing in alternatives for their clients, with diversification and risk mitigation their two most common drivers. 

That’s not to say that the switch from institutional to individuals is all plain sailing. The largest fund managers have already dipped their toes into the retail market – and in doing so highlighted many of the challenges this shift presents. Blackstone’s US Breit was the flagship for the investment firm’s charge into the retail world. It came unstuck at the tail end of last year when economic uncertainty prompted heavy redemption demands – despite solid performance – ultimately resulting in the gating of the fund. The retail fund’s semi-liquid structure just wasn’t compatible with an investor group used to the liquidity of the public markets. 


Getting to grips with a new way of doing things

The learning curve for funds trying to attract and service individual investors is steep. Managing large groups of investors with very different expectations, risk profiles and financial literacy requires a complete step change for many managers. 

Large investors might be familiar with the industry’s manual onboarding processes, but individuals certainly aren’t. Shaped by the public markets, these investors expect digital onboarding and speedy access to investment products – funds that can’t provide this simply can’t compete. Essentially, tech is fast becoming a competitive differentiator for those looking to attract individual investors. 

The handy flip side to this need for greater tech adoption is that it provides solutions to a couple of other pressing problems as well; scalability being the big one. Legacy systems designed to manage a small number of large investors don’t scale well when faced with an influx of individuals. Digitising parts of the investor management process – such as onboarding and capital calls – removes a significant amount of the administrative burden from fund managers and their distribution partners, enabling them to manage a growing number of investors more efficiently and cost effectively. 

Liquidity is the other big barrier to entry, and is the reason individuals haven’t cracked into private markets en masse (yet). Nearly half (48%) of advisors cite liquidity as their top concern around the use of alternatives for their clients. It's a problem the fintech ecosystem is all over, with innovations like secondary marketplaces and tokenization starting to pop up in various quarters. 

For funds, distribution and marketing is THE frontier that still needs conquering if they’re to embrace individuals. Gone are the days when relationships alone could grow AUM, now funds need to find new ways to create mainstream awareness for their products. Intermediaries are already helping to bridge this gap, and there are a number of platforms established in the market that offer individuals direct access to a range of alternative investment opportunities, but they’re still something of a niche offering.


The case for evolution 

Retail investors are the fastest growing private market segment, but their inclusion brings with it a whole new set of challenges. It is technology, with its ability to tackle these hurdles, that will provide funds with the tools they need to unlock the growth potential of individual investors.

The opportunities might be huge, but they’re not simply there for the taking. PWC estimates that 16% of existing asset and wealth management organisations won’t be around by 2027. As an industry, we’re hurtling rapidly towards a ‘make or break’ moment  – that 16% is double the historic rate of turnover.

The ability to attract, serve and retain individual investors then will be a determining factor in which firms thrive and which fall by the wayside. Embracing new technologies is a must, but doing it too quickly is as detrimental as not doing it at all. 

Technology is essential to opening up the private markets to individuals, but we need to understand our limitations and chart a measured path. That means new solutions that integrate with existing systems to support a gradual upgrade. Individual investors are the next major growth engine for alternatives, but bringing private market assets to smaller individuals is a marathon, not a sprint.


 *Hedgehog projection, uses institutional allocation as an indicator of likely long-term allocations for individual investors.



Nothing in this article constitutes financial advice or guidance. The content in this article is an opinion and is for general information purposes only. This article is not intended to be relied upon to make financial decisions. It is not intended to be financial advice. The value of your investment can go up or down so you may get back less than your initial investment. The article may contain links to third-party websites or resources. Hedgehog provides these links and resources only as a convenience and is not responsible for the content, products, or services on or available from those websites or in those resources, the links displayed on such websites or the privacy practices of such websites.‍

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