Hurdles to private markets investing for high-net-worth individuals are
increasingly easier to overcome, paving the way for substantial individual
investment over the next five years.
High-net-worth allocations could represent an additional approximately $1.5
trillion-worth of assets under management by 2025, according Morgan
Stanley‘s recent Wealth and Asset Management: Competing for Growth report.
Illiquidity, high minimum thresholds, limited diversification, regulatory
and operational complexity, and lack of access have traditionally made it
difficult for these individuals, whom the report defines as worth between
$1 million and $50 million, to successfully gain private market exposure.
Conversely, institutional investors, including family offices and
ultra-high-net-worth individuals, hold around 90 percent of today’s more
than $7 trillion private markets AUM. That AUM could grow to around $13
trillion by 2025, aided by HNW investment, according to the report.
Here are the four factors paving the way for the increased investment.
First, technology-driven distribution models for private markets are
expanding. These platforms can aggregate individual demand, effectively
lowering capital thresholds; curate private market portfolios, providing
diversification; and digitise and streamline end-to-end processes,
including subscription, reporting, capital calls and distributions.
The largest of these platforms include the likes of iCapital Network, which
manages $75 billion, and Yieldstreet, which manages $2 billion in the US
and Moonfare, which manages nearly € 1 billion, in Europe. Compounded
annual growth rates over the last three to five years for these platforms
measure over 100 percent, according to the blue paper.
These platforms are mutually beneficial: alternative asset managers,
particularly on the smaller end, will see a drastic reduction in their
distribution efforts relative to efficacy. They will also ease middle and
back-office operational burden, reducing cost and risk while improving
functionalities in reporting, onboarding and access to secondary markets.
New products on the market
Next, a broad range of innovative private market products are emerging.
Asset managers have developed ‘semi-liquid’ and packaged products with
improved diversification. There are a number of liquidity mechanisms they
can incorporate, including recurring subscriptions, redemption discounts,
limits and suspensions, credit facilities for capital calls and secondary
sales and purchases.
Consultants and funds of funds have created ‘turnkey’ products for more
diversified exposure across funds and managers. These types of product
innovation will be the key driver for larger alternatives managers’ AUM
growth by way of sticky retail in-flows, according to the report.
Third, different jurisdictions are starting to allow greater individual
participation in private markets by easing investor eligibility
requirements and embracing the aforementioned product innovations. The
Securities and Exchange Commission amended its definition of ‘accredited
investor’, expanding the eligible pool to participate in private markets,
taking into account financial sophistication in addition to net worth.
Additionally, the US Department of Labor has provided protections for
companies to begin offering indirect private equity investments in 401(k)
In Europe, the European Long-Term Investment Fund regime enables retail
investors access to private market investments, which could see similar
success as BDCs and investment trusts in the US and the UK, respectively.
As regulators greenlight the use of less-liquid instruments for retail
investors, the question will be whether or not asset managers are ready to
capture the opportunity: the costs associated with setting up ELTIFs dwarf
those of mutual fund products.
Lastly, the adoption of blockchain-enabled technology could accelerate
private market democratization in the longer term. The lack of common
standards in highly-intermediated private markets means that each
underlying investment is often unique, requiring its own bilateral contract
and highly manual intervention in administration. This process is time and
labor intensive and relies on scarce and asymmetric data from infrequent
Blockchain offers a decentralized and intermediary-free, immutable, open
and auditable and real-time network. The single interface would provide
complete transparency to all stakeholders, allowing more control over asset
ownership and investor credentials, quicker asset transfers at current
valuations and up-to-date legal guidance, and more active portfolio
monitoring and reporting. This technology even has the capability to
broaden the scope of investable asset classes in illiquid assets like
collectables and real estate through the creation of non-fungible tokens
(NFTs), security token offerings, and enhanced secondaries.
This piece was updated to reflect the AUM of iCapital, Yieldstreet, and
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