Are private markets really becoming mainstream?

The private markets sector has grown dramatically over the past decade, amounting to $13.1tn (£10.2tn) in 2023, but in recent years it has started to pitch towards the retail investor, offering new or alternative instruments to the typical public market funds.

In the UK it has been given the nod by the Financial Conduct Authority with the creation of the long-term asset fund (LTAF), doing something similar to the European long-term investment fund (ELTIF), and interval funds, business development companies (BDCs) and non-traded real estate investment trusts (Reits) in the US.

There are also other routes to market for the suitable investor, and new platforms enabling such ventures.

But the question is: who are they suited to and could they really have mass appeal to the retail investor?

An early mover in this space is alternative asset manager behemoth Blackstone, the largest in the world of this kind of investment with $1tn under management. It has products available in real estate, private credit, private equity and infrastructure.

Joan Solotar, global head of private wealth solutions at Blackstone, which looks after $260bn of assets, says that it is very much about diversification.

“If you look at private markets versus public, almost the whole investing universe is private. In areas like infrastructure, real estate and PE, the number of private companies is nearly 10 times that of publicly listed companies.

“You have the potential generate higher returns and can diversify your stock and bond portfolio, and there were many periods, for example in 2022, when the correlation between stocks and bonds was unreliable.”

“If you want to invest in a PE fund that’s generating 12 per cent annual returns, for every $1 you’re investing in 10 years that will generate three or four times your money – it’s about benefiting from compounding.

“The key is to think about which part of my portfolio can I invest for five or 10 years, in which I can benefit from compounding.”

What’s driving the push?

The push by the large providers into the individual investor space has been driven by a number of factors.

There has been declining interest from the big institutional players who have historically made big allocations to the sector; since the global financial crisis, and particularly since the pandemic, they have become over-allocated due to private markets’ outperformance of public sector.

The private asset managers have also not been helped by rising interest rates, which has hampered liquidity for the PE houses who rely on leverage, while the current decline in the IPO market has prevented exits, and therefore distributions to investors and further liquidity.

Meanwhile, on the client side there is increasing interest among the high-net-worth, who are after the performance.

According to Preqin, the private market data analyst, performance in private equity over the 10 ten years to June 2024 saw internal rate of return of 15.3 per cent, net of fees.

Jonathan Herbst, global head of financial services at law firm Norton Rose Fulbright, who advises private equity clients, says: “Higher-net-worth retail clients want a slice of the good returns to be found in this sector. There have been astounding returns in PE; sensible people who have money [invested] will therefore likely want to explore the opportunities. There’s demand and there’s supply.”

Much of the performance in the private space comes from leverage, the ability to borrow to fund acquisitions, as it is an amplifier, hence the influence of interest rates on the performance of many PE funds.

But it is unconventional activities – at least compared to the public market – which will determine whether a fund will be regulated and how; the ‘semi-liquid’ or ‘evergreen’ funds, such as LTAFs in the UK, fall under the high-risk investment category of restricted mass market investment, or count as an alternative investment fund, regulated under the alternative investment fund managers directive, if they are direct investment via a pooled fund into a larger fund run by the likes of Permira or KKR.

Notable evergreen funds
Fund	Manager	Primary strategy	Total fund size ($bn)	Inception date
JPMorgan Infrastructure Investments Fund	JPMorgan	Infrastructure	$37.7	July 1 2006
Morgan Stanley Real Estate Prime property Fund	Morgan Stanley	Real estate	$30.0	August 1 1973
Sequoia Capital Fund	Sequoia Capital	Recent IPOs and VC	$23.4	January 1 2021
Blackstone Property Partners	Blackstone	Real estate	$14.6	October 30 2014
Brookfield Super-Core Infrastructure Partners	Brookfield	Infrastructure	$9.1	August 3 2018

(Source: PitchBook)

LTAFs were launched four years ago as a regulatory structure designed to allow greater liquidity for investors wanting to make use of illiquid assets. They typically allow monthly subscriptions and quarterly redemptions, although this can vary, and were opened up to the individual investor in 2023.

They tend to be treated as open-ended funds, and an investor buys in at NAV.

There are now 26 of them registered with the FCA, some offering a broad range of investments, and others more focused, such as on credit, climate or growth.

To complement their illiquid assets, they will hold some liquid stocks, such as money market funds – some evergreen funds hold equities of private equity investment trusts; they will also hold cash, and many of them, both here and elsewhere, will put a cap on quarterly redemptions of 5 per cent.

This is rarely used as investors can typically get 100 per cent of their assets back when they want, over the life of the product, says Jerry Pascucci, co-head of unified global alternatives at UBS Asset Management, which underwrites and distributes some of these products.

“Without these limitations, these products could not be offered. These should not be considered ‘liquid’ because of the redemption policies, but these were required in order for us to support the offerings.”

Hitting the liquidity limit occurred in a very public way in 2022 when the Blackstone Reit had to suspend redemptions when interest rates rose and property values fell.

Solotar says that this was the 5 per cent cap kicking in. This means that Blackstone could meet their redemption requirements further down the line.

“Every quarter in most months you would be able to get 100 per cent of your money out. If there are redemption requests of more than 5 per cent of that quarter we will pro rate. ”

“A gate is when you can’t meet that 5 per cent, and so you’re gating, and providing either less than 5 per cent or nothing – a couple of our peers have gated.”

For Mara Dobrescu, senior principal for fixed income strategy ratings at Morningstar, this may not be enough. “If funds allow 5 per cent of their assets to be redeemed every quarter and keep 20 per cent in liquid assets, it only takes three or four quarters for that liquidity sleeve to be fully exhausted.”

However, for some in the business, this liquidity buffer is actually holding back private markets funds from their full potential.

Steffen Pauls, a former managing director at KKR, and now the founder and co-chief executive of private markets platform Moonfare, says: “It’s important to understand in these products there’s a cash restraint, that means not all of your money is working in private equity, only a portion, and the rest of your money sits in a money market account; that’s quite a substantial brake on performance.”

His platform allows investors, at a £60,000 entry level, to invest via a feeder fund into the bigger private equity funds, which would normally only be open to those with several million to invest; it does not have the same liquidity requirements of an LTAF or semi-liquid fund.

The money is set aside for 10 years and is invested over four years, after several years the distributions start getting paid. However, the liquidity point has been addressed, he says, because Moonfare has devised a secondary market if people need access before the end of the 10-year cycle.

Moonfare charges between 40 bps and 75 bps on top of the typical 2 per cent plus performance fee of the fund.

LTAFs, and other semi-liquids, have a variety of entry points, depending on the product and the region it is being distributed, but can be the low tens of thousands, up to £100,000 plus.

Discussing disclosure

A frequent complaint by investors is that they do not know what their money is being invested in or receive the full disclosure that one would receive from public markets.

Hamza Azeem, managing director of evergreen portfolio management at Hamilton Lane, which has a $9.5bn global evergreen platform, says many of the strategies are primarily buyout – these are performing companies that are already profitable.

“These are not early stage venture-type opportunities where the outcome can be more risky.”

Solotar notes too much openness can be a bad thing, and can prevent businesses making strategic decisions due to investor unpopularity.

One such investment she cites is QTS, which met public resistance to it building a data centre, as shareholders did not want it to spend its money.

“When it was public, every time it wanted to build out its data centre portfolio it had to consult [on its strategy]. Often, the public market would respond negatively, which translated into the company being capital constrained.

“We can take a company and make it better and make the right decisions without the volatility of the public market. There’s nothing nefarious going on. It’s like a law firm, you’re not disclosing everything.”

But Dobrescu says investors should be allowed to know more about what is happening.

“The disclosures are not as comprehensive as traditional public markets. The investments are all very new, and it’s going to be difficult to judge the manager selection [process].

“Usually there’s very little track record to go on; it’s very difficult to know if the manager has a history of making the right calls.” Plus there are not the same benchmarks as public markets have.

The FCA has also this week voiced concern about valuations of assets held in these funds. Dobrascu says concerns are there because there can be questions over the valuations, and the independence of the people doing these valuations, when a manager is trying to save on cost and go internal.

Not so niche anymore?

Nonetheless, in the UK, LTAFs are still creeping into advisers’ awareness, and they have not established themselves on adviser platforms as yet, in part because adviser platforms are set up for daily liquidity. Currently one must typically go through a private bank or large wealth manager to invest in them

In regions outside the UK, however, some think the world has moved on from thinking of private markets as a niche product.

Pascucci, who is based in the US, although has a global perspective, says: “These things are becoming less alternative.

“Let’s say your [portfolio analyser] suggests you should have exposure to small-cap sector. Do you do that via an index, or a large fund, or via a commitment to a growth equity fund provided by a [general partner] in a private equity space, because all of these companies are in the mid-cap areas you’re interested in.

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Are private markets really becoming mainstream?

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