Posted: 02 Feb. 2023 5 min. read

Private Markets: Retail demand and the opportunity at stake

Private market managers continue to face high demand for their products, according to Preqin’s recent report Alternatives in 2023, AUM is expected to increase to $23.3trn by the end of 2027, from $13.7trn at the end of 2021. While retail investors are currently a small portion of this, the growth in interest from this previously underserved segment is projected to accelerate. Capturing this market is a huge potential opportunity for both Private Market Managers and Wealth Managers. In this blog series we will discuss how the developments in technology, specifically across distribution platforms, and a refreshed regulatory landscape can unlock this channel.

A ThoughtLab study conducted with Deloitte and other industry partners showed that clients across generations and wealth levels are seeking more specialised products to build their portfolios. Two-thirds of clients polled plan to be using alternative investments such as hedge funds and private equity over the next two years. With retail investors continuing to search for alpha, the interest in accessing the traditionally exclusive world of private markets has continued to grow. 

While often viewed as the default for retail investors, the well-known 60/40 portfolio has fallen in both popularity and returns, with a recent Bank of America research noting portfolios constructed like this face their “worst annualised returns in 100 years”. Alternative asset classes may be an option to help retail investors to meet their desired outcomes for example with the potential to offer diversification through hedge funds, protection from rising interest rates through private credit and inflation protection in real assets. While turbulent market conditions are not yet set to pass, the appetite for less correlated and enhanced returns from private markets allocations is unlikely to diminish in the long term.

From a manager’s perspective, while the AUM projections and investor demand are positive indicators, it is also important to understand how distributors are preparing for this. According to the same ThoughtLab study, almost two-thirds of providers plan to offer alternatives over the next two years. Another attractive factor for managers is the potential for higher fees in alternatives compared to traditional asset classes. Traditional managers seeking increased revenues in the challenging operating environment could boost their profits by capturing a share of private market inflows. 

However, there are also associated risks and costs for managers to efficiently manage private market assets from the wealth channel. Regulatory risks are a key aspect of this, with managers needing to ensure they can evidence products are being offered only to the clients with the appropriate risk appetite and profile. Liquidity is also another significant challenge that needs to be appropriately managed for the needs of this different client base. Short term market headwinds and a risk-off mind-set may continue through 2023, and as we have seen recently even well-established funds are not totally immune to an influx of redemption requests. This should be a timely reminder that managers needs to carefully consider the liquidity features of products targeting the retail channel.

Overall, the backdrop and drivers for growth in the private markets retail space have been brewing for some time. Key levers such as innovative product structures (including ELTIFs and LTAFs) and technological developments create an environment in which this opportunity can be realised. Future blogs will further explore the democratisation of alternatives for retail investors, focusing on safe and effective routes to delivering alternative products into this growing channel.

Authors

 

George Lindsey

Senior Consultant

Lewis Watkins

Manager in Consulting

Author

James Alexander

James Alexander

Director

James is an experienced Investment & Wealth Management leader who focuses on helping investment and wealth managers to effectively deliver their strategic priorities. His experience ranges from advising on acquisitions, developing and building new business unit and entering into new markets, digital transformation and distribution, and delivering Target Operating Models from design through to implementation. He leads our private markets and alternative investments practice.