Is retailisation a misnomer?

Call it ‘retailisation’, democratisation, or any other fabricated word to denote the move towards accessing a wider pool of capital from individual investors, this trend is not necessarily met with open arms by GPs across the globe.

Dechert recently published its 2023 Global Private Equity Outlook, which highlights that 92% of those surveyed believe retailisation or democratisation of the industry will have a slight to significant negative impact on returns.

The results are based on insights from 100 PE executives surveyed across Asia, Europe and the US.

While the findings concentrate on managers’ negative perception based on returns, perhaps they also highlight a general sentiment of aversion to this growing trend, despite the hype surrounding the future digitalisation of the industry and the potential to access a wider pool of capital from a new type of investor.

Behind the numbers
There are many reasons that could explain the headline figure. The report suggests there is apprehension around increasing deal competition, while other GPs expressed concern about the future of the traditional 2% management fee, as the rise of index investing has decimated fee structures in asset management.

Moreover, Sabina Comis, global managing partner-elect at Dechert, shares what she believes to be the main hurdles to accessing the individual investor: “GPs will need to team up with various sponsors, be it insurers, private banks or fintechs, to access this new pool of individual investors. At some point in time, I expect asset managers to create their own mechanisms of accessing the individual investor. However, the main hurdle to successful retailisation at the moment is regulatory in nature, with certain tax and legal impediments relating to the definition of an accredited investor and which funds they are eligible to access.”

The overall GP sentiment, particularly in the mid-market sector, reflects the current hurdles around scaling retailisation from an operational perspective. The amount of work involved in the onboarding, performing due diligence, KYC, accreditation and subscription processes will not be possible on a large scale in the present day. It is currently too time-consuming and most mid-market GPs do not yet have access to digital tools to harness this new possibility. Technology, as well as clearer regulation, will remove certain hurdles preventing retailisation.

Calling a spade a rake
The word retailisation derives from ‘retail’, a term that should refer to the everyday individual, not HNWIs with high minimum investment potentials. The same goes for democratisation, a word that invokes the idea that the industry will become equally accessible to all.

However, today the terms are used interchangeably by industry leaders to refer to the expansion of the PE industry to both HNWIs and accredited individual investors.

Defining the exact investor being targeted is a crucially important aspect of making private markets more inclusive, as the definition of retail investor will affect which private funds are accessible to them under regulatory constraints.

Marco Bizzozero, head of international and member of the executive committee at iCapital, a global fintech company providing feeder funds at lower minimums to wealth managers, stresses the importance of educating advisers and investors about the products in which they are investing.

He comments: “Education is a key component of our value proposition because it is essential that advisers and their clients understand the characteristics of private market investments such as their illiquidity, their long-term investment nature and how the asset class fits in a diversified portfolio.”

He adds that from a GP perspective, the increased focus on fundraising from the wealth management channel is also supported by new technological advancements aimed at facilitating and speeding up the onboarding process from a significant number of individual investors via wealth managers, resulting in significantly reduced overall distribution efforts.

Digital world
iCapital is a digital fintech platform that creates a bridge between alternative asset managers and wealth managers on one side, and their clients on the other, using technology to allow both parties to scale, achieve a better client experience and improve operational efficiencies. The firm creates feeder vehicles tailored to various jurisdictions to distribute alternative investment opportunities for private clients and HNWIs with a lower minimum investment amount, typically between $125,000 and $150,000.

Bizzozero comments on the importance of digitalising the process: “Technology is facilitating access to private market investments by private clients, through a simplified and digital onboarding process, transparent reporting and automation of transaction processing (including capital calls and distributions), allowing wealth managers to efficiently scale their private markets offering for their clients.”

Moonfare is another well-known investment platform for individual investors, which has a fully automated and digitalised process. The minimum investment to the funds offered typically starts at £50,000 for UK investors.

Steffen Pauls, founder and CEO of Moonfare, explains the onboarding process: “From our customers’ perspective, it's a 15-minute process to get onboarded. After an investor signs up, the accreditation process follows. This is where we find out the type and eligibility of the investor from a regulatory perspective. The next step is fund selection, where the information is displayed. It’s all digital and automated, so it doesn’t matter if you are dealing with 100 or 1,000 investors.”

For mid-market GPs to even contemplate retailisation, they will need to leverage the technology available, either by partnering with such platforms or putting their own systems in place by harnessing automation processes.

New kid on the block
Pauls stresses that history shows the private equity industry can absorb significant capital injections into illiquid assets without negatively impacting returns. He speculates that the advent of new, semi-liquid investment categories such as European Long-Term Investment Funds (ELTIFs) in the EU may be one issue prompting industry commentators to fear falling returns.

The EU recently reformed its ELTIF framework to encompass master feeder and fund-of-fund structures, allowing access to retail investors without necessarily needing an operational overhaul.

In this light, Pauls suggests: “It really depends which funds you are talking about. For example, ELTIFs are semi-liquid funds and are catered more towards the retail investor. In this case, the capital is called upfront so there might be a lower return on the liquid part of the fund. Also, providing liquidity, by definition, means also that you have lower return on the liquid portion of your product.”

Nonetheless, Bizzozero maintains: “In the context of construction of an individual client portfolio, to achieve diversification and potentially improve risk-adjusted returns, private markets cannot be ignored anymore. Companies stay private for longer and most of the value creation is coming from private companies, i.e. outside public markets. For this reason, it is becoming increasingly more desirable for individual investors to increase their private market allocations.”

Optimistic outlook
For most mid-market GPs, it might be best to sit tight until new opportunities arise and regulatory hurdles are addressed. Harnessing the latest technology is a long-term goal and does not happen overnight.

That being said, the industry should be cautious about the terminology it uses around this trend, as the true retail investor appears to still be out of reach.