Private assets for the masses

Product innovation and a regulatory overhaul meant 2023 was a big year for the democratization of private markets in private equity.

Continued product innovation in 2023 resulted in many additional opportunities catering to the specific needs of private investors. Most notably, we saw a proliferation of semi-liquid structures. These structures tend to be highly regulated alternative investment funds that offer liquidity after the initial lock-up period in more frequent increments than would have been possible in the past. We expect this trend to continue in 2024. The regulatory regime surrounding European Long-Term Investment Funds also continued to evolve in 2023: we saw triple the number of fund launches than in the previous year. Additionally, the ELTIF regime has been overhauled, effective from the start of 2024, and we expect to see further acceleration as a result. Industry participants were able to feedback on how the regime has been structured to date, and that has resulted in what we believe is a very sensible and investor friendly format.

Finally, people have invested a lot of time and energy into understanding how the administrative and operational process around alternatives actually works. That isn’t a straightforward process. As a result, a lot of positive developments have taken place over the course of the last year, giving investors a more seamless experience.

It’s a nuanced picture. There are pockets of alternatives that private investors may want to stay clear of right now, but there are also pockets where the timing is probably better than it has been at any point in the past decade.

We believe that private equity secondaries offers the most attractive opportunity today. High-quality LP portfolios are changing hands at compelling discounts where the existing owner either wants to sell, or has to sell, often because they are simply overallocated to the asset class. Meanwhile, GPs are turning to the secondaries market because traditional exit routes are currently challenging. GP led secondaries transactions can help create liquidity options for LPs and are creating interesting opportunities for secondaries investors.

There is a big premium to be placed on experience. If an institution has a track record of managing semi-liquid instruments through the cycles, then that should definitely be deemed an advantage. Investors also need to consider how liquidity is being produced within the fund. Under normal market conditions, secondaries investments, for example, produce around 10-20 percent of liquidity per annum. That is a great contribution to the liquidity buffer that is required to manage a semi-liquid vehicle.

If you have an asset allocation that consists primarily of comparatively liquid private equity assets, you are not required to hold as much cash on your balance sheet as you would if you are investing in a lot of primaries or directs. Double-clicking on the precise nature of the asset allocation in these semi-liquid structures is another way in which investors can help mitigate or manage the risk they are taking.

Education is absolutely key and, in particular, liquidity cannot and should not be oversold. It is important to clearly state that even with semiliquid structures, liquidity is idiosyncratic and not systemic. In other words, investors can fall back on those liquidity mechanisms if individual circumstances require them to withdraw capital but never in times of market downturns. During a downturn, the gates of these funds will come down and investors may not be able to get all – or, indeed, any – of their money back. People must understand that these funds are not ATMs. Private investors should think about the liquidity of semi-liquid private markets funds in the same way they would think about the liquidity of a holiday house or a vintage car – something that can be sold, but probably shouldn’t be sold under duress. Something else that private investors commonly fail to appreciate is the diversification potential of private assets. They tend to look at return expectations and liquidity terms but disregard the effect the investment can have in terms of diversifying their portfolio. As a result, there is a lot of education required around portfolio construction. Following this, it is simply a case of repeating and repeating these messages until they become as native as other investment instruments.