Regular attendees of private markets conferences in recent years will no doubt have noticed a prolif­eration of panels dedicated to democratisation on the agenda. 

What these panels often demonstrate is that private equity’s democratisation isn’t necessarily welcomed by all. Views are usually mixed, with some lauding this lucrative new source of LP capital while others remain wary of the potential implications on valuations or private equity’s reputation if investments turn sour.

At the London School of Economics Alternative Investments Conference in February last year, participants generally welcomed the idea of a democratised industry. “An interesting trend in the capital-raising story is the rise of vehicles focused on individual investors,” Nadim El Gabbani, senior managing director at Blackstone, said during a panel. “That will be a trend that will be here to stay over time and ultimately one that promises to offer the returns of alternatives to folks within regular brokerage accounts.” 

Patient capital

El Gabbani noted that democratisation is important because individual investors are driven towards liquid assets without any particular need for that liquidity. “We’ve effectively forced large portions of the self-directed market to be in highly liquid assets when their need for those assets isn’t an immediate need,” he added. “They are saving for retirement that might happen 20 years from now.”

This sentiment was echoed at IPEM 2022 in Cannes in September. “If your retirement is 30 years off, why should you be left to invest only in daily liquidity assets or investment assets, ETFs, mutual funds?” said Verdun Perry, senior managing director and global head of Blackstone Strategic Partners. “Why can’t you have the same access to PE, talented managers, that can generate great risk-adjusted returns over long periods of time? If your time horizon is 10, 20 years, why can’t you have access today?”

Educating the masses

Of course, there are also risks to consider when it comes to democratisation. One of the biggest concerns has been how to properly educate individual investors on the unique qualities that private equity possesses. The consensus among most panellists last year was that communication is key to ensuring new investors are making the right choices.

“As long as you educate people on the fact that this is not a liquid asset that they can decide next year they can pull out of… I don’t see any downside [to opening access],” said Mark Corbidge, managing director at Sun European Partners, at February’s Alternative Investments Conference.

Speaking at the Invest Europe conference in Geneva in March, Adam Harrison, chief commercial officer at Titanbay, said his platform is investing heavily in educational modules to address this issue. 

“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],” said Harrison. “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.”

At the British Private Equity and Venture Capital Summit in October, panellists reached the same consensus. John Gilligan, director of the Oxford Saïd Finance Lab, said the key to fully and successfully democratising private markets will be to create a language that the average person on the street can understand, rather than catering only to those with specific financial expertise.

“You’re lacking a language that is compelling to anybody outside of your industry, to explain what you’re doing,” he added. “Because what you’re doing is investing other people’s money to create value, and you’re doing it well.”

On the same panel, Joana Rocha Scaff, head of European private equity at Neuberger Berman, said it would be “dangerous” for constituents to not be fully educated on the asset class before diving in.

Reputational damage

There are also reputational risks to consider. Private equity has fallen under heightened scrutiny from the mainstream media, politicians and regulators in recent years after several high-profile failures, such as the 2018 collapse of Toys ‘R’ Us.

If individual investors aren’t aware of the risks and illiquidity of private equity, for example, the asset class could suffer further in the public eye.

Panellists last year were in agreement that, beyond educating investors on private equity’s nuances, the next priority should be ensuring that investors have the best possible experience.

“We want to get this right because there is great purpose and [there are] great outcomes we can get if we do this well,” said Marie Dzanis, head of EMEA at Northern Trust Asset Management, at Private Equity International’s Women in Private Markets Summit in London in December. 

“The last thing you want is to have an investor have a bad experience,” she added. “And that comes with a heavy burden of education and making sure that our products are titled the way that they do what they say they’re going to do, and that there’s a very clear, transparent methodology and approach that each one of us would offer in our product offerings so investors aren’t likely to be harmed.”

At the Invest Europe event in March, Frans Tieleman, managing partner at French GP Eurazeo, warned that liquidity issues could harm both investor and GP alike: “If you’re marketing to private individuals, you have issues in capital calls… 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.”

Of course, private equity’s democratisation is only just getting started; views and concerns will evolve and shift accordingly. What is apparent from the panel discussions held last year is that most industry participants concur: as long as it’s done responsibly, opening access to private equity is largely a good thing. Now, the only thing left to do is settle on the most responsible and efficient way to achieve this.