Aaron Grunwald: People in the industry describe bringing private market funds to new clients as ‘retailisation’. Personally, I don’t think that’s the best word because it implies that the funds are available to retail investors, which is not exactly the case. Would you agree with my whinge, or do you have another perspective?

Lucienne Andring: I would, indeed, agree with your opinion. And indeed, I use the word ‘democratisation’, and democratisation of private markets is underway. It is a trend that started a couple of years ago, and it is currently accelerating. I see it on two sides, on the product side, with my clients in asset servicing--and here, maybe I will step back and put it in context. As you are aware, the historical main business line of Banque de Luxembourg is private banking. But next to that we have another business line, which is asset servicing. This is a business that we started in the ’80s, servicing investment funds, administration for investment funds.

I set up a specialised team in servicing private market funds back in 2007. This segment has had very strong growth over the last 10 years. I have a number of clients [that are] private equity firms and asset managers that are setting up--next to their product for their institutional client base--dedicated products for clients that come from the wealth management channel, high net worth individuals, family offices, etc. So I clearly see this trend on that side of the business. We also have initiators launching platforms like Moonfare, for example, platforms that are based on technology.

Then on the other side, on the demand side, in our private banking department, we have growing interest and also rising demand for private assets products from our private banking clientele, who are looking for diversification of their overall portfolio allocation.

For people who don’t know the subject very well, what are the benefits of retailisation or democratisation of private market funds for asset managers, intermediaries and investors?

Let’s start with investors. Individual investors continue to have very low allocation to private equity funds. In Europe, only 3% of private client assets are invested in private equity. The reason for this has been mainly the difficult access to this type of product for this type of clientele, given the very high investment minimums, but also no access to top-tier managers. This is changing right now. Democratisation is taking place with products requiring, for example, lower minimum [investments], and that is very attractive for individual investors in an environment where we have high public market volatility... inflation and where they need to look for diversification of their portfolio.

Their motivations are understandable because private markets have delivered solid returns over a longer time horizon. They have outperformed public markets during the last 20 years. And something that is very important is that we are in an environment where companies are staying private longer and even listed companies are delisting. So, there is a lot of value creation that is taking place outside the public market.

Right, because if you’re not a billionaire, you’re not able to just buy out a company, you want to be able to access through a fund?

Through a fund and have part of a company or part of a number of companies.

On the other side, if you’re a private market fund, do you really want to switch from dealing with 20 or 30 investors to 200 or 300 investors? Seems like it would make things more complicated. So what is the selling point for them?

It is important to put this in context. Today, institutional investors account for more than 90% of raised capital by private asset funds, and they will continue to provide the majority of capital raised by this type of fund over the next years. That’s a given. And at the same time, significant growth is expected from the individual investor channel and asset managers see an opportunity in accessing this growing pool of money. So it makes sense to bring both parties together.

So the capital will be available, and they’re going for this segment because there’s interest there?

There is interest, as there’s demand from the investors. For [fund firms], it’s an opportunity to diversify their fundraising, even though the institutional part is much bigger. I mean, the other part is growing, there is demand, so why not go for it?

But this will make their operations more complicated. Are they looking to fintech solutions to handle the shift?

As you said before, what is challenging is to have not 20 investors bringing big tickets, but 100 or 200 investors bringing smaller tickets, and so, from an operational point of view, it is very important to get that right. And here, service providers come in, or technology platforms could come in. What is very important is to have streamlined processes, automated processes. Digitalisation will clearly be important, and there are specialised service providers to help the asset managers and to bring both offer and demand together.

What are the advantages for private banks and wealth managers?

Financial advisors and wealth managers face the demand from their clients. And it is an opportunity for them but also a responsibility to the client to develop a solid and strong private asset product offering. And that’s what we did. We had the demand from our clients, and we have been building a product to meet that demand.

If you have a look at numbers, it is estimated that individual investors will more than double their commitments to private equity funds by 2025, so it is really an important opportunity for wealth managers, for private banks. It allows them to broaden their product range, adds new sources of revenues, and it is a very attractive tool to attract new clients or more money from existing clients. That’s, for me, a rather important point when we talk about the benefits of retailisation or democratisation.

What are the drawbacks for investors? Do they understand how liquidity and risks differ from retail funds? What should we warn people about?

What is very important is that individual investors have to be aware that private equity investments or private asset investments are illiquid investments. That’s very important. A typical PE fund has a [lock-up period] of 10 years, and the investor cannot exit their position. Investors have to understand that a long-term commitment is required. That’s really the crucial point. And here, investor education comes in. I believe that financial intermediaries, private banks, wealth managers have an important role to play in investor education. They have to explain the particularities of this type of product: what is a commitment, a capital call? How is this mechanism working? How are the cash flows working, etc? It is really a new asset class for a private banking client. And it’s very important that they get comfortable with the way this product works.

The asset manager probably won’t be able to do this, so is it a bit of challenge for you because you’re investing more time in the same client?

Investing time in a client is really the core business of a private banker. So that’s worth the time that you spend with the client... it’s important for this type of asset class to have trust.

Banque de Luxembourg seems to be focusing mainly on private equity, but are other types of private market funds, like infrastructure or real estate, a good fit for this segment?

Private equity clearly drives the global growth in private markets. That’s overall, the whole industry. Now coming back to private banking, most of our private banking clients, and that’s also true across the [financial centre], are looking for private equity, especially those who are new to this asset class. For those who are new, private equity is often the strategy when they like to begin to invest.

Why is that?

Because it is the biggest part of the market, because it is well known, because it’s the real economy, so they can see in what companies they are investing.

Wealthy investors are not particularly interested in real estate funds. That’s a little surprising to me because real estate is a business that should be easier for them to understand.

Yeah, but a lot of private banking clients already have direct real estate investments in their portfolio. They do not need to go through a fund. They’re buying, you know, a house in south of France or in the Swiss Alps. They are overall quite exposed to real estate. Private equity is more difficult to get exposed to directly if you are an individual investor.

So does that bode well for infrastructure funds? It’s not easy to buy part of a bridge or solar farm.

Or part of a road... when we look at more seasoned investors... there is clearly a demand for infrastructure, and more particularly its sub-sectors, for example, to support energy transition, such as an alternative energy, energy efficiency, cleantech solutions.

Then you also have venture capital. Venture capital is often of particular interest to investors with an entrepreneurial mindset. Entrepreneurial families are very close to venture capital, they want to participate in an early stage company, in another success story.

Then I would say, for the new generation of investors, they are keen to see the impact of their investments in the real economy, and they are actually looking for funds with a sustainable strategy. And then something that is a very, very important rule, as in public markets, what we tell our clients is that it’s very important to build a diversified alternative portfolio. To diversify on multiple levels, strategies, managers, geography, but also vintage.

There is a lot of excitement in the industry about the democratisation of private market funds. From your perspective, will it become a major segment or remain niche?

It depends how you define niche. What is very clear is the demand for private assets by individual investors will continue to grow. As I said before, it is estimated that their allocation will double by 2025, so there will be strong growth.

We also see at the asset manager level, all larger asset managers are launching new products in this area, with different strategies. They want to respond to the growing demand. Private banks will obviously play an important role, as they have to do the investor education, and they will direct clients to suitable products. That’s what we see.

Now, when we put it at the level of the whole industry, if we look at private market [funds], it’s an industry of $8trn [in 2020 that will nearly] double by 2025, to more than $15trn in assets under management globally. And the individual investor share is estimated to be 9% to 10% today [that will rise to] around 10% to 12% in 2025. So, yes, it is a lot of money, but it is a small part of overall assets under management in the whole industry.

3% of $15trn is ‘not nothing’, but is this a more profitable line of business? Private market funds don’t scale as easily and as economically as Ucits funds. Will the margins be healthy enough?

First of all, if there is demand, it’s good to respond to the demand. There is a need, private investors want to diversify their asset allocation. And there has been strong growth and outperformance in private markets, so private investors want to take part in that investment universe. If there is demand, and if the asset managers are putting in place products for the private investor, is it profitable? Obviously, it is. And it is profitable also for other participants.

Wealth managers are going to structure new product offerings around this because the products are quite complex. So it is important for the private investor to get the right advice. They should probably speak to someone who is well aware of different types of products and who has the capacity to give them some advice, so probably their private bank or wealth manager can add some value in the whole process. And so it will be profitable. Yes, it will.

But in my view, it’s a different business from the institutional private asset business. If you have a look overall at the private asset industry, the big part will remain the institutional business, maybe it will go from 90% to 88%, but it still will be the big part of the industry.

So if you’re a private bank or wealth advisor or another type of intermediary, if you want to keep your market share, you’ll have to offer this?

Exactly... if you want to keep your market share, if you want to attract new clients, then you have to offer it. And it makes sense. Maybe 10 years ago, it was difficult as there were no real products. But today we have products. So it makes sense to offer them and really for a private bank it’s a key differentiator to have this product offering.

Do you think that this concept of retailisation or democratisation has been overhyped?

I would say for sophisticated investors--so high net worth individuals, even maybe to some extent affluent clients--it has not been overhyped. There has been development, and there is a trend that is there and that will stay. For retail clients, I would say yes.

Because it’s probably not suitable for them?

One of the disadvantages is that it is a complicated asset class. And as an investor, you really have to be aware that it is not liquid, and you if you need liquidity tomorrow, you will not have the possibility to exit your position. And if you exited, you will not get the right price. Probably there will be no valuation or you will get a discount.