The democratisation of private markets is a topic on many industry participants’ minds. 

In essence, democratisation means opening alternatives up to new investors – not just large, established institutional LPs, but much smaller entities and individuals who haven’t yet had the opportunity to delve into private markets.

Digital fundraising platforms with the explicit aim of making alternatives accessible to high-net-worth investors began cropping up in the 2010s – among them iCapital in 2013 and Moonfare in 2016. Ever since, many have found themselves pausing to consider the opportunity.­

Though still widely debated, the concept has reached new levels of popularity in the last few years. One recent driver behind this has been the denominator effect, which has run rampant through private markets drying up traditional LP capital. According to the Rede Liquidity Index 2H 2022 Report, 35 percent of the 115 institutional LPs it surveyed expected to decrease commitments to new PE funds over the following year. This compares with only 17 percent six months previously.

With many LPs forced to reassess their alts allocations in the face of an uncertain market, for many fund managers, a new source of LP capital is welcome. What’s more, with private equity often reporting superior returns compared with its public equivalents, demand from investors is surging in turn.

Pros and cons

Definitions of retail investors vary. High-net-worth and ultra-high-net-worth individuals are two examples. Others include the mass affluent and emerging affluent, who sit at the high end of the mass market but don’t have quite as much capital to invest as their HNW counterparts. Some of the other investors being targeted by GPs include DC or 401(k) pensions, and mom-and-pops. Combined, this is an enormous – and growing – source of capital. 

“The private wealth segment represents one of the biggest opportunities for industry today,” says Robert Collins, co-head of private wealth at Partners Group. “[But] it is essential that you attract the right kind of investor – people who have a deep understanding [of] what they are investing in and have a long-term investment philosophy.”

An insufficient understanding of the asset class is something that has historically held fund managers back from engaging with individual investors: while institutional LPs can be well versed in the nuances of PE, the danger, sources tell us, is that smaller investors can be lured in by the promise of high returns without fully understanding the risks.

“Are you offering a vehicle that is easy to access for these clients?” asks Pilar Junco, managing partner and chief client officer at AltamarCAM Partners. “Are they able to read the [vehicle] documents? Because English is not everyone’s first language. So, if you send them a batch of legal documents, in a language they are not fully comfortable with and with a structure that might have adverse fiscal consequences, they might just decide, ‘Oh my God, this is such a headache to understand it all.’”

There are several types of vehicles available to retail investors, ranging from single-manager or multi-manager feeder funds to direct offerings courtesy of an investment bank or fintech provider. Democratised products – such as the European Long-Term Investment Fund, the UK’s Long-Term Asset Fund and open-end, semi-liquid funds – are another option.

At the upper end of the retail market, the private wealth opportunity is growing. Many GPs are willing to overlook the potential pitfalls of associating with this investor group in exchange for a huge source of capital that is unlikely to dry up anytime soon.