PE’s democratisation carries ‘big risk’ for industry, LPs warn

Firms must ensure individual investors are sufficiently educated, said executives from Skandia Mutual Life Insurance Company and Ontario Teachers’ Pension Plan at Invest Europe’s Investors’ Forum last week.

Private equity’s efforts to come downmarket have sparked concerns among some investors of the potential for reputation damage if not done correctly.

The democratisation of private equity was a hot topic at Invest Europe’s Investors’ Forum last week, with multiple LP delegates warning that there are serious risks to consider when opening access to less sophisticated investors.

Sofie Kulp-Tåg, senior investment manager at Skandia Mutual Life Insurance Company, told Private Equity International on the sidelines of the event that reputational problems could come to the surface if too many uneducated individuals start investing.

“It’s a big risk for the industry,” she said, noting that investors not being able to fund their capital calls is a key concern. “You really need to make sure that investors understand the asset class and how long you have to stay in the game.”

Education is key to mitigating this risk, Maggie Fanari, global co-head of high conviction equities and a managing director of the Teachers’ Innovation Platform at Ontario Teachers’ Pension Plan, said on a panel. As the majority of retail investors are new to the asset class, they must be given the requisite information on its unique processes and long-term horizons before making any commitments.

“It is about investor education, but at the same time also ensuring that retail investors have the same level of information as institutional investors,” Fanari noted. “What you really want to see is transparency and consistency of information across the board.”

This sentiment was echoed by Frans Tieleman, managing partner at French investment manager Eurazeo. “If you’re marketing to private individuals, you have issues in capital calls,” he said on the same panel. “You have issues with making sure that these are the people who are actually smart enough and informed enough to invest in this private equity business.”

Tech as a tool

Private equity’s increasing appetite for private wealth capital was the subject of PEI’s February deep dive into private wealth.

Tech platforms are at the forefront of this push, helping to streamline and automate process often considered too resource-intensive to manage at scale.

Speaking at the Invest Europe event, Adam Harrison, chief commercial officer at Titanbay, said the platform is investing heavily in educational modules to help less experienced investors become more familiar with private equity.

“If you look at how the industry today communicates itself, it’s very varied, of course, from GP to GP, and that makes it very difficult for somebody who’s new to the business to actually get familiar with [it],” he said. “And so, one of the things that we work really hard on is to simplify information and to present it in a familiar way… The familiarity boosts confidence.”

BNP Paribas Wealth Management is similarly investing in its technology offering. Claire Roborel de Climens, global head of private and alternative investments, told PEI that improving the customer experience and digitalisation of BNP’s offering is one of its top priorities. This is key, she said, to keeping pace with technologically savvy investment platforms such as Moonfare and Titanbay.

“As an example, if a client plans to commit, let’s say, one million in a fund, it’s our role to advise him to commit only half, according to his profile and several criteria,” she added.

“This is the kind of advice we can give to clients – very tailormade and personalised advice – and that teaches the client about risk profiles. We have this very deep knowledge of our clients and their personal wishes, but these other platforms don’t have this knowledge of the client to compete. So, we see them certainly as complementary, but not as competitors.”