Sophisticated individual investors are where the money’s at. Or increasingly will be.
The private equity and venture capital (PE/VC) markets have long been the preserve of institutional investors. According to alternatives data provider Preqin though, the wealth management sector is set to be a primary driver of the private market industry’s next growth phase.
Private investors turn to private assets
In its Future of Alternatives in 2027 report, Preqin predicts private market assets under management will surge to $18.3 trillion by 2027, almost double the $9.3 trillion held by the industry at the end of 2021. Rising retail interest in alternatives will fuel the growth, the report noted – led by sophisticated, high-net-worth investors keen to diversify their portfolios and tap into the long-term returns and capital preservation potential on offer.
As McKinsey observed, retail investors represent a pool of over $50 trillion. While allocations to private markets to date have been stuck in the low single digits, principally due to historical access constraints, it noted “a combination of changing regulations, product innovation, and new GP distribution capabilities is bending the penetration curve.”
Various studies certainly indicate a powerful groundswell of demand.
A recent survey by reputation management consultancy Lansons reported that a fifth of Americans would strongly consider investing in alternative assets, with 7% already planning to do so. Active investors – those who currently have investment accounts for stocks, bonds or cryptocurrencies – “would be willing to allocate 25% of their portfolios, on average, to alts,” the survey found. Only 17% of active investors said they are unwilling to allocate any of their portfolios to alts.
Similar trends are evident in Europe. Regulation – including the European long-term investment funds (ELTIF) proposal, which was approved by the European Parliament’s Economic and Monetary Affairs Committee on 12 January, and plans to broaden distribution of Long Term Asset Funds (LTAFs) in the UK – could further stimulate individual investor inflows.
Understanding what’s at stake
The confluence of demand and supply requires an additional factor however: suitability.
While mass affluent investors may be drawn to the headline returns on offer in the private market space, it is imperative they fully understand the fees, risks and commitments involved.
After years of abnormally low interest rates, global quantitative tightening is reshaping the rate curve. Vanilla fixed income securities now offer more competitive yields, eating into the investment case for parts of the alternative’s universe. Lower equity valuations may offer potential for gains too, as recent market rallies have demonstrated. Plus there can be wide performance dispersion between different alternative asset classes, and the strategies and funds in those classes.
As the Lansons report noted, educating potential investors about the investment case for alternatives, addressing any misperceptions, and building compelling and differentiated brands will be “key to gaining market share in this nascent industry.”
Meeting investor expectations
PE/VC offerings aimed at individual capital allocations will need to be well targeted if they are to deliver on expectations and build investor trust. Focusing access on sophisticated investors and those with industry experience who understand the prospective gains available, and the terms on which they are offered, will help avoid any expectation gap.
Opportunities must then be well vetted if investors are to achieve the outsized returns they seek. Partnering with regulated managers that invest across diversified portfolios and have a proven track record gives the PE/VC platforms that are emerging as a primary conduit for individual investors the best chance of meeting their goals.
This content is for information purposes only. Treble Peak does not provide investment or tax advice, and information on this website should not be construed as such. Potential investors should seek specialist independent tax and financial advice before investing in any alternative investment. Past performance is not a reliable guide to future returns. Your capital is at risk