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Private equity (PE) has long been the domain of institutional investors and ultra-high-net-worth individuals. However, in recent years, there has been a growing push to open the asset class to retail investors. As ‘democratization’ trends gain traction, PE firms are weighing the opportunities and challenges of catering to this new investor segment.
Retail access to private equity has been expanding, fueled by regulatory shifts, product innovation, and increasing investor demand for alternative assets. Several key trends highlight this movement, including regulatory adjustments, such as when the SEC tweaked the definition of “accredited investors” and the enabling new fund structures like interval funds and tender offer funds.
Fintech solutions are making it easier for individual investors to participate in private equity through fractional ownership and feeder funds, with some of the largest, most well-known asset managers now working with these platforms. And significant demand is coming from the wealth management segment, as their clients are showing more interest in the asset class.
On the supply side, private equity firms are also adjusting. Some have launched retail-friendly vehicles, while others are integrating more transparency and liquidity features to appeal to non-institutional clients.
The enthusiasm around retail investing in private equity suggests a promising growth area, but the reality is more nuanced. While demand exists, the extent to which it translates into sustainable inflows for PE firms depends on several factors.
Retail investors often prefer liquid investments, whereas private equity typically involves long lock-up periods, so firms must strike a balance between illiquidity premiums and investor expectations. Check size is another; although some platforms have lowered entry barriers, many retail investors are still priced out of direct PE investments. Additionally, compliance and disclosure requirements differ significantly when targeting retail investors versus institutional ones, increasing the operational burden for PE firms. This is a headwind unlikely to get better for those buyout managers looking to raise money from the retail segment.
Still, for those GPs that wish to take the plunge, and who can check the range of compliance boxes, other considerations emerge when moving into capital raising mode.
While retail access to private equity is expanding, many PE fund managers may hold outdated or incorrect assumptions about this investor class.
The classic objection is that retail investors are unsophisticated. While it’s true that many retail investors may lack the deep institutional knowledge of PE, some are highly informed, and the education level is increasing over time. More importantly, they frequently invest through wealth managers, who act as intermediaries and bring a level of professional oversight and often serve as a check and a balance on the individual’s views.
But not all financial advisors are equally adept at navigating the complexities of PE structures, fees, and liquidity terms. PE firms looking to engage with the wealth management community will need to be prepared for more conversations around education than they do with institutions so that they can be confident that the wealth manager represents them accurately to the end clients.
And, while many of the initial communication in the retail space will be with wealth managers, over time, they are more likely to have direct communication with the end investor.
For private equity firms looking to tap into the retail market, success will require thoughtful structuring of funds to align with retail investor needs, strong partnerships with wealth managers and financial advisors, robust investor education and transparency initiatives, and scalable investor relations and reporting processes.
While challenges remain, the retail segment could certainly provide many private equity firms with an additional avenue through which to grow their businesses and indeed, many are doing so. But the ones that embrace this shift with a strategic approach to communication are more likely to be the ones that succeed in the medium to long term.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
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