Private investors are knocking on the doors of private markets: who opened them?

 

 

Individual investors have shown their appetite to access private markets; however, these assets have been managed mainly and traditionally by pension funds and other institutional investors.

The digital transformation of the industry has been a key element in these investors accessing and investing in private capital, according to the study "Private Asset Investing Desperately Needs New Market Infrastructure" by Bain & Company, which will help overcome many of the obstacles that have, up until now, hindered the democratisation of assets.

In this post we summarise the report's main conclusions, why private investors have become interested, the barriers they encounter when accessing private markets and how they overcome them.

Although 50% of global wealth is held by individual investors, they only represent 16% of these assets. In fact, around 38% high-net-worth professional investors and 53% ultra high-net-worth individuals would like to increase their allocation of private alternative assets.

The demand is there: is the offer ready? They are not the only ones interested in gaining access to private markets, private capital firms and management companies are also keen to expand the business towards individual investors. This development would not only benefit individual investors and management companies, but also private capital companies, large institutional investors and other providers.

If private investors want to invest and the firms want to provide them access: where is the problem? According to Bain & Company: "A new system is required to meet the large and growing demand for this type of assets among individuals".

The authors insist that in order for this market to succeed, the current model must evolve towards a robust digital system that can efficiently support the individual investor's interest.

According to the consultancy firm, this interest comes from the desire to obtain greater diversification, among other reasons. They have also noted that family offices allocate a considerable proportion of their portfolios to private assets.

According to the report's authors, there are several barriers that make it difficult for individual investors to access private markets and that must be resolved in order to give them access:

• High administrative costs
• Illiquidity
• Unpredictable cash flows
• High minimum investment amounts
• Financial advisors without in-depth knowledge of private markets

In addition, unlike public markets, private markets have a limited digital infrastructure. They also usually lack transparency in certain data, such as profitability, costs and underlying investments.

As explained in the report, the current system was designed for large institutional investments with tailor-made and manual processes that have not created significant problems, in spite of their ineffectiveness. "However, the lack of a digital and rationalised model makes it almost impossible for individuals to achieve a broad distribution. Building a new model is the answer, but it will involve changes throughout the sector's value chain”, highlights the report".

Author

Crescenta