PART III: Private Wealth and Unleashing the Power of "Quiet Money"

Gintare Hennick
14 February 2024
The core thesis of our private markets series is that every investor will hear and will want to learn more about private markets. The historically opaque and access constraint industry is now opening up to more investors, especially in the private wealth segment. Below we analyse the key factors that are driving this trend.

Private Wealth at Scale
Bain & Company, estimates that the global AUM of institutional capital is between $135T - $145T, huge amount but somehow not surprising. However, what if someone tells you that even higher amount is held by individual investors. Bain & Company has estimated that the amount of global wealth held by individual investors is around $140T - $150T or roughly 50% of total global wealth, with only 16% allocation to alternatives. What is the catch here, you will ask? Well, according to Bain, between 38% and 53% of these individuals would like to increase their allocation to private equity. Also, Bain & Company projects that institutional capital allocated to alternative investments will grow 8% annually over the next decade. Individual wealth invested in alternatives, meanwhile, is expected to grow 12% annually over that period, albeit from a much smaller base. Taken together, these sources would support 9% annual growth in AUM through 2032, still better than 8%. Especially for large private asset managers that are focused on AUM growth. So let the race commence!

Source: Bain & Company report "Why Private Equity Is Targeting Individual Investors"

Source: Bain & Company report "Private Asset Investing Desperately Needs New Market Infrastructure"

New Initiatives
Or shall we say continue. According to Bain & Company, private equity has already made significant progress reaching individuals at the highest end of the spectrum ($100m to $500m-plus), and the mass affluent segment at the bottom is the most shielded by regulation. Consequently, the industry is focusing most of its attention on the large untapped market in the broad middle, using innovative fund structures and technology solutions designed to make the historical barriers less onerous.

In the last couple years, we have seen the rise of private wealth divisions in all major banks, general asset managers and large private equity houses. According to Pitchbook, the most active recruiters of private wealth talent were Apollo, Blackstone, Ares, KKR and EQT. The other noticeable shift towards private wealth segment is the rise of evergreen funds, the next generation private market funds with semi-liquid structures, more structured cash flows and other features that entice individual investors. Whilst access and marketing restrictions still apply, the new structure is more flexible to meet individual needs compared to the traditional private equity model. What started couple years ago with a handful of products, now it became a mainstream trend. One would be hard-pressed to find a large fund of funds manager that does not have this product. And yet, according to Bain's survey, there are no clear favourites in this race as of now. The brand recognition in alternatives is still very low, ask a wealthy individual who the big names in private equity are and “I don’t know” rises to the top, followed by large financial institutions such as Fidelity and Charles Schwab that barely have any presence in alternatives.

Source: Stepstone presentation "Compounding returns through evergreen funds"

Retail market developments
Whilst there is still a huge scrutiny and regulatory burden on marketing private markets products, especially for mass-affluent segment, there are more and more developments in this space. Goldman Sachs report discusses the developments of the European Long Term Investment Fund ("ELTIF") that was established in the EU in 2015. Institutional investors have long benefited from private investments, which have the potential to provide higher returns, portfolio diversification and access to unique investment opportunities. The ELTIF aims to help address some of the obstacles that have made it challenging for individual investors to benefit from the same potential opportunity. The first version of ELTIF was too restrictive and did not get enough traction from the industry players. However, the new revised version of this initiative started in January 2024 and had some major changes: removal of minimum investment and investment cap for retail investors, to name a few. Whilst it does not mean that every investor can or should access these type of funds, this initiative will open up space to more individuals and lay the ground work to further democratize access to private markets.

Source: Goldman Sachs reports "What is and ELTIF?"

Private equity’s traditional focus on building lasting relationships with a relatively small cohort of large institutional investors means the industry has done little historically to create the distribution and marketing infrastructure required to reach individuals and build awareness with them. But that’s also changing with some intermediaries like Moonfare, iCapital, Opto or Titanbay creating partnerships and educating both advisers and individual investors. The major companies are stepping in as well with Blackstone creating their own private markets education program, KKR and Hamilton Lane offering tokenized fund solutions. 

The potential to tap into private wealth is huge and the initiatives are moving in the right direction to democratize access to more individuals. Nonetheless, multiple challenges and considerations remain. The stringent regulation aside, the traditional model of private equity will need to adapt and evolve to consider more fragmented investor base, with different investment horizons and liquidity needs or ability to meet their financial obligations in the long term. Individuals, who will want to invest, will need to learn more about this asset class. Automation will play a key role in the fragmented client base that requires education, perhaps more attention and generally more distribution at scale. A challenge that not every private markets players will be ready to take on.

Source: Bain & Company report "Private Asset Investing Desperately Needs New Market Infrastructure"

There is a huge amount of untapped capital that is looking to allocate to private markets. The largest firms have made major strides to unlock that pocket of capital but none of the winners have emerged as yet. The private markets are growing and moving towards more democratized access, so be sure you will see more educational content created for individual investor needs. It does not mean that private markets is a suitable opportunity to all individual investors. Those who will want to invest, will need to learn about the risk of investing in illiquid asset asset class. But the direction of travel is clear, to be followed by a lot of education and even more automation. Exciting times!

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