Bringing private equity to the people
How can more people have access to private equity’s investment returns in a responsible way? The question of ‘democratisation’ was on almost everyone’s lips at this year’s BVCA Summit.
Private equity is in the early stages of a seismic shift in its investor base, according to speakers at this year’s BVCA Summit. However, catering to a more mass-market investor base in a responsible way will require careful thought around the right structural mechanisms.
Historically, private equity has been an institution-only asset-class due to its high-ticket sizes, negotiated fund placements and inherent illiquidity. This is changing, with new technologies making it easier for fund managers to sell to smaller clients, and new policy and rules making it easier for individual investors to access alternative investments.
Earlier this month, the Department for Work and Pensions announced new proposals to exclude well-designed “performance-based fees” from the 0.75% cap on costs and charges that currently applies to investments made by the default arrangements of defined contribution pension schemes. The existing rules present a barrier to DC schemes seeking to allocate to private capital funds, and the BVCA has long supported reform in this area. We will continue our constructive engagement with DWP.
In addition, the FCA recently authorised a new structured called the Long-Term Asset Fund to encourage participation in private markets by defined contribution pension investors.
Such initiatives are also important for raising awareness of the different timeframes and expectations around illiquid investments in a structured way, consistently reinforcing that investing in illiquids requires deep expertise and a long term investment horizon. Being as inclusive as possible is a worthwhile aspiration, but some counsel a cautious approach to innovation and the pace of change.
Meanwhile, there are already a significant number of stock exchange listed investment companies that provide access to private equity strategies for retail investors, said Henry Freeman, strategic adviser to WE ARE GUERNSEY, a jurisdiction where many private equity funds and listed investment companies are domiciled.
“Because they are closed-ended funds…managers don’t have to sell assets should investors wish to sell their shares,” said Mr Freeman. This means they are a time-tested way of managing the illiquidity challenge.
Private wealth could lead the way
In between retail investors and the institutional market lie various types of private wealth investor. Catering to this rapidly growing investor base could provide individual fund managers with an opportunity to develop the skills and resources required for smaller, non-institutional investors.
“As we expand our investor base, I continue to observe a strong correlation between the strength of a relationship with the length of a relationship, no matter the type of investor” said Investcorp’s Laura Coquis. “One area we’re monitoring is how to best cater to the needs of smaller aggregated investors when the relationship is structurally indirect.”
Unlocking this ‘wall of capital’ is expected to have a profound impact on the industry and its ability to spread wealth more widely.
“I think there is a huge opportunity within private wealth over the longer-term,” said Hg’s Martina Sanow, adding that the proportion of private wealth investing into Hg’s funds has doubled over recent vintages.
As a market-led phenomenon, catering to the private wealth segment (which includes family offices and high-net worth individuals) could provide a valuable opportunity for the industry to adapt as it seeks to spread the benefits of its wealth creation ever wider across society.