Hurdles to private markets investing for high-net-worth individuals are increasingly easier to overcome, paving the way for substantial individual investment over the next five years.
High-net-worth allocations could represent an additional approximately $1.5 trillion-worth of assets under management by 2025, according Morgan Stanley‘s recent Wealth and Asset Management: Competing for Growth report.
Illiquidity, high minimum thresholds, limited diversification, regulatory and operational complexity, and lack of access have traditionally made it difficult for these individuals, whom the report defines as worth between $1 million and $50 million, to successfully gain private market exposure.
Conversely, institutional investors, including family offices and ultra-high-net-worth individuals, hold around 90 percent of today’s more than $7 trillion private markets AUM. That AUM could grow to around $13 trillion by 2025, aided by HNW investment, according to the report.
Here are the four factors paving the way for the increased investment.
First, technology-driven distribution models for private markets are expanding. These platforms can aggregate individual demand, effectively lowering capital thresholds; curate private market portfolios, providing diversification; and digitise and streamline end-to-end processes, including subscription, reporting, capital calls and distributions.
The largest of these platforms include the likes of iCapital Network, which manages $75 billion, and Yieldstreet, which manages $2 billion in the US and Moonfare, which manages nearly € 1 billion, in Europe. Compounded annual growth rates over the last three to five years for these platforms measure over 100 percent, according to the blue paper.
These platforms are mutually beneficial: alternative asset managers, particularly on the smaller end, will see a drastic reduction in their distribution efforts relative to efficacy. They will also ease middle and back-office operational burden, reducing cost and risk while improving functionalities in reporting, onboarding and access to secondary markets.
New products on the market
Next, a broad range of innovative private market products are emerging. Asset managers have developed ‘semi-liquid’ and packaged products with improved diversification. There are a number of liquidity mechanisms they can incorporate, including recurring subscriptions, redemption discounts, limits and suspensions, credit facilities for capital calls and secondary sales and purchases.
Consultants and funds of funds have created ‘turnkey’ products for more diversified exposure across funds and managers. These types of product innovation will be the key driver for larger alternatives managers’ AUM growth by way of sticky retail in-flows, according to the report.
Third, different jurisdictions are starting to allow greater individual participation in private markets by easing investor eligibility requirements and embracing the aforementioned product innovations. The Securities and Exchange Commission amended its definition of ‘accredited investor’, expanding the eligible pool to participate in private markets, taking into account financial sophistication in addition to net worth. Additionally, the US Department of Labor has provided protections for companies to begin offering indirect private equity investments in 401(k) plans.
In Europe, the European Long-Term Investment Fund regime enables retail investors access to private market investments, which could see similar success as BDCs and investment trusts in the US and the UK, respectively. As regulators greenlight the use of less-liquid instruments for retail investors, the question will be whether or not asset managers are ready to capture the opportunity: the costs associated with setting up ELTIFs dwarf those of mutual fund products.
Lastly, the adoption of blockchain-enabled technology could accelerate private market democratization in the longer term. The lack of common standards in highly-intermediated private markets means that each underlying investment is often unique, requiring its own bilateral contract and highly manual intervention in administration. This process is time and labor intensive and relies on scarce and asymmetric data from infrequent diligence processes.
Blockchain offers a decentralized and intermediary-free, immutable, open and auditable and real-time network. The single interface would provide complete transparency to all stakeholders, allowing more control over asset ownership and investor credentials, quicker asset transfers at current valuations and up-to-date legal guidance, and more active portfolio monitoring and reporting. This technology even has the capability to broaden the scope of investable asset classes in illiquid assets like collectables and real estate through the creation of non-fungible tokens (NFTs), security token offerings, and enhanced secondaries.
This piece was updated to reflect the AUM of iCapital, Yieldstreet, and Moonfare.