Are private markets the solution to the headwinds that are hitting the global stock markets head on? It’s a question worth pondering, given the €8trn in assets under management as of 21 December 2021, according to the Association of the Luxembourg Fund Industry. Especially since “we have also seen a broad diversification of asset classes, product design, liquidity mechanisms and time horizons”, Robert White, partner at EY Luxembourg, noted ahead of a panel discussion at Alfi’s Global Distribution Conference on Tuesday 20 September.
This greater, more varied and complex activity in the private markets therefore seems to respond to an alarming observation in the stock markets. “In 2022, there will be less than half the number of companies listed on the US stock exchange, which has not been the case for a long time,” observed Ed Venner, chief operating officer at Franklin Templeton. So is this a boon for the private markets? “There are fundamentally more opportunities to generate returns in private markets than there were even five years ago,” he said.
Short-term or long-term vision?
So there is every reason for asset managers to look at the private markets to tailor their offering to their clients. This is one of their tasks, which is part of their fiduciary responsibility. Nevertheless, private markets remain difficult to access for retail investors.
“Retail investors expect some form of monthly or quarterly liquidity,” said Joshua Stone, managing director at EQT Fund Management. “When we’re dealing with retail investors, they’re looking to buy a car. Then, five years later, they send their children to university. And they retire... maybe 20 years later.” The search for yield is therefore diametrically opposed to institutional investors who take a long-term view.
Yet Stone refused to be called a pessimist. “I’m convinced that there are obviously a lot of opportunities, but you have to manage them properly.” He stressed the importance of financial education for both end investors and financial advisers themselves. Barriers to market entry, restrictions on redemptions, redemption fees and sometimes limited liquidity are all reasons why private assets are not meeting the expectations of the entire retail client base.
As retail interest in the private markets has grown, so too has the interest of regulators. “The rise in retail investor interest in this asset class has obviously led authorities and governments to consider how to open the doors to them,” explained Claire Prospert, partner at Linklaters. “In the US, the Securities & Exchange Commission looked at the definition of an accredited investor and expanded it a few years ago. We are also seeing an increase in open-ended investment funds managed in the US,” she said.
In Europe, the ongoing review of the European Long-term Investment Fund regulation (Eltif) is also expected to broaden the notion of retail investor. However, this change is aimed more at high net worth individuals than at traditional retail clients. The change in the regulatory framework in no way removes barriers to market access. Market access barriers, the main cause of illiquidity in private assets, may well disappear with the emergence of tokenisation solutions.
Originally published in French by Paperjam and translated for Delano