Retail Investor Funds Accelerate Private Equity’s Democratization Drive
Slowing capital inflows from institutional investors amid a more challenging economic environment has provided greater momentum for the so-called democratization of private markets. There is increasing impetus around the launch of retail investor-focused funds, as well as new products to make private investments more liquid and accessible. In opening access to previously untapped investors, democratization is seen as the next important step in the transformation of private equity into a fully mainstream asset class and in turning its largest exponents into household names.
New Funds Target “Mass Affluent” Category
Family offices and ultra-high-net-worth individuals have long provided a strong source of commitment for private equity and venture capital, typically in the range of 10-15% of total capital raised, according to European trade body Invest Europe. Many of these investors access the asset class through comingled closed-end funds on the same terms as institutional investors, or via their own separately managed accounts.
As levels of wealth have grown, firms have become increasingly focused on tapping into a broader group of affluent individuals. According to a 2023 survey by Invest Europe and consultancy firm Arthur D. Little, 85% of European GPs are interested in marketing funds to high-net-worths with wealth in excess of €500,000, while over half (51%) are considering the “mass affluent” segment of individuals with assets of €100,000–€500,000 —both percentages a significant increase on the previous year’s survey1.
The attraction of this group is the scale of its resources. According to research cited by Bain & Co, individual investors hold about half of global assets under management, estimated at $275tn–$295tn, but only represent 16% of AUM in alternative asset funds2.
Targeting individuals requires a different approach from typical institutional funds, including liquidity options for investors who are not used to long-term, closed-end vehicles, and who may experience an unplanned need for capital. As a result, demand has increased for greater investor flexibility, including for evergreen and semi-liquid products.
In January, Blackstone announced that it had raised $1.3bn for Blackstone Private Equity Strategies, its largest ever retail fund, which will allow for up to 3% of the vehicle’s assets to be redeemed each quarter. It also sets lower management and performance fees than traditional private equity funds in return for a lower hurdle rate3. Other firms are seeing a strong appetite from private individuals, with KKR recently telling analysts that it was raising some $500mn a month for retail-focused strategies, marketed as its K-Series suite4.
The emergence of new technologies can also facilitate access to private markets via retail investor-appropriate ticket sizes. For example, investment company ADDX uses blockchain technology to fractionalize and tokenize investments, aiming to provide customers with transparency and liquidity. Initiatives such as these underscore the importance of innovation in rendering private markets increasingly accessible to individual investors.
New Funds Target “Mass Affluent” Category
Family offices and ultra-high-net-worth individuals have long provided a strong source of commitment for private equity and venture capital, typically in the range of 10-15% of total capital raised, according to European trade body Invest Europe. Many of these investors access the asset class through comingled closed-end funds on the same terms as institutional investors, or via their own separately managed accounts.
As levels of wealth have grown, firms have become increasingly focused on tapping into a broader group of affluent individuals. According to a 2023 survey by Invest Europe and consultancy firm Arthur D. Little, 85% of European GPs are interested in marketing funds to high-net-worths with wealth in excess of €500,000, while over half (51%) are considering the “mass affluent” segment of individuals with assets of €100,000–€500,000 — both percentages a significant increase on the previous year’s survey1.
The attraction of this group is the scale of its resources. According to research cited by Bain & Co, individual investors hold about half of global assets under management, estimated at $275tn–$295tn, but only represent 16% of AUM in alternative asset funds2.
Targeting individuals requires a different approach from typical institutional funds, including liquidity options for investors who are not used to long-term, closed-end vehicles, and who may experience an unplanned need for capital. As a result, demand has increased for greater investor flexibility, including for evergreen and semi-liquid products.
In January, Blackstone announced that it had raised $1.3bn for Blackstone Private Equity Strategies, its largest ever retail fund, which will allow for up to 3% of the vehicle’s assets to be redeemed each quarter. It also sets lower management and performance fees than traditional private equity funds in return for a lower hurdle rate3. Other firms are seeing a strong appetite from private individuals, with KKR recently telling analysts that it was raising some $500mn a month for retail-focused strategies, marketed as its K-Series suite4.
The emergence of new technologies can also facilitate access to private markets via retail investor-appropriate ticket sizes. For example, investment company ADDX uses blockchain technology to fractionalize and tokenize investments, aiming to provide customers with transparency and liquidity. Initiatives such as these underscore the importance of innovation in rendering private markets increasingly accessible to individual investors.
Retail Investors and Investment Advisors Require More Education
Unlocking retail investment in private equity not only means new fund structures, but also new ways of providing access and a new approach to (and infrastructure for) investor relations. Some offerings, such as German private equity start-up Moonfare, are built around technology platforms that enable investors to take positions — and trade — selected private equity funds. Still, at €50,000 or €100,000 (depending on the product), its minimum commitment requires both investible assets and relative comfort with private equity.
Retail Investors and Investment Advisors Require More Education
Unlocking retail investment in private equity not only means new fund structures, but also new ways of providing access and a new approach to (and infrastructure for) investor relations. Some offerings, such as German private equity start-up Moonfare, are built around technology platforms that enable investors to take positions — and trade — selected private equity funds. Still, at €50,000 or €100,000 (depending on the product), its minimum commitment requires both investible assets and relative comfort with private equity.
For many smaller retail investors, entry into the asset class will come via financial advisors and banking services. Large wealth managers and advisory firms have in-house private equity expertise, enabling them to manage private markets programs for clients. In contrast, knowledge is more limited among smaller groups and individual advisors, putting the impetus on private equity firms to offer education and insights as well as access. A number of leading sponsors have taken up the mantle when it comes to training, not only at the outset but during the life of the investment. One example is Blackstone University, which seeks to educate private wealth advisors about private markets and has had some 14,000 participants at its events since launching in 20115.
Other firms are also investing time and money into relationships with advisors. For example, some sponsors maintain private wealth teams, focused on building and maintaining relationships with wealth management partners, as well as dedicated fundraisers to work with investment advisors to raise capital.
For many smaller retail investors, entry into the asset class will come via financial advisors and banking services. Large wealth managers and advisory firms have in-house private equity expertise, enabling them to manage private markets programs for clients. In contrast, knowledge is more limited among smaller groups and individual advisors, putting the impetus on private equity firms to offer education and insights as well as access. A number of leading sponsors have taken up the mantle when it comes to training, not only at the outset but during the life of the investment. One example is Blackstone University, which seeks to educate private wealth advisors about private markets and has had some 14,000 participants at its events since launching in 20115.
Other firms are also investing time and money into relationships with advisors. For example, some sponsors maintain private wealth teams, focused on building and maintaining relationships with wealth management partners, as well as dedicated fundraisers to work with investment advisors to raise capital.
ELTIF Regime Makes Private Equity More Accessible
The drive from private equity firms to target retail investors is being met by an increasingly favorable regulatory climate in Europe. The revised ELTIF 2.0 (European Long-Term Investment Fund) framework was launched in January with the aim of encouraging more private investor commitments into private capital, and more private capital investment into the European economy.
One key change from the initial framework launched in 2015 is the removal of the €10mn investment threshold for funds, enabling ELTIFs to invest in a wider range of assets and opening up the vehicles to smaller firms. Another is to allow ELTIFs to invest in alternative assets from other managers, effectively facilitating the creation of fund of funds-style offerings. According to Scope Group data, the market is expected to reach €50bn by 2028, up from €11.3bn at the end of 2022.
European firms have been moving into the space in preparation for a more favorable environment, with 2023 marking the launch of a number of new vehicles, including a real estate strategy from French firm Eurazeo and a credit fund from M&G. Since January, more have entered the market, with Moonfare launching its own ELTIF for investors with a minimum investment of €10,0006, well below the threshold of its other products.
Opening up private equity to retail investors invites much more scrutiny of the asset class, and it will require more education and retail-friendly structures. However, it also promises to unlock billions in retail investor capital and, in keeping with an increasing appetite for access to the asset class, make private market strategies more of a mainstream choice for the many.
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