In recent years, there's been massive uptick in interest in so-called “retail” private equity and predictions are that such growth will continue. According to Boston Consulting Group and iCapital research, high net worth individual allocations to private equity are expected to more than double by 2025 from their 2022 levels, reaching US$1.2 trillion. Needless to say, many asset managers are keen to tap into this private wealth opportunity.
Much attention has been paid to the challenges and opportunities of retail PE from an asset manager's perspective, but should mega investors be concerned about the rise of private wealth channels?
Many are asking how this new capital source – with its own regulatory infrastructure and liquidity construct – will influence how asset managers think about private investments. For example, do these regulated products pose platform-wide operational risks (whether regulatory, litigation or otherwise) that may indirectly impact a manager and/or the more traditional closed-end funds through which a mega investor may have invested?
Should operational due diligence questionnaires be updated to better probe a managers systems and processes for managing these regulated products even where the investor is considering an investment in a closed-end product and not the retail product? In the long term, will “retailization” open the door to expanded regulation of private equity markets in a way that negates some of their advantages over public markets more broadly?
Related, as these retail PE products grow, investors may want to consider whether the different liquidity horizon of the retail products may influence what investments an asset manager pursues at the platform level and/or how it manages investments (including when the timing or form of exits).
These are not simple questions and the answers will vary, but as these alternative products for retail investors become more commonplace, they are questions that mega investors will want to explore as they consider their own allocations to illiquid asset classes.
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