Retail appetite for private equity driving investment into technology
As institutional investors continue to insource their investment capabilities and the shift continues from defined benefit to defined contribution models, a growing focus for asset managers is developing direct-to-consumer products and distribution.
This in turn has spurred the growth of “liquid alts” products that thus far are modelled primarily to resemble hedge fund-types of investment strategies. By contrast, few such options exist for investors who are seeking to approximate private equity strategies.
Private equity has been a markedly sturdy asset class, with generally good performance making it one of the most in-favour asset classes amongst institutional investors. However, private equity exposure historically has been very difficult to provide to retail investors, due to the large minimum investments required, as well as the impediments of illiquidity, lack of investment/valuation transparency, and fee structures.
Still, while retail investors have an increasing appetite for liquid investment vehicles that can offer exposures and return streams similar to private equity, few asset managers are able to offer retail open-ended alternative products that approximate a limited partner’s private equity exposure. Instead retail investors have historically tended to access private equity only by investing in listed private equity firms, which provide a return stream similar to that of the general partner, but reduced by the expense and compensation structure of the management company.
As this demand continues, asset managers have increasingly been looking for new approaches that give them the ability to provide liquid private equity-like products. One such example is a Liquid Private Equity Investable Index, which allows asset managers to launch a commingled fund that invests in liquid assets weighted to approximate private equity sector allocations. Such products enable retail investors to pursue a private equity sector allocation without the minimum investments that are prohibitive for most and without the impediment of illiquidity.
Such products are also of interest to institutional investors who are either uncomfortable with the illiquidity of private equity investments or are waiting for a capital call for assets they have allocated to private equity. To be clear, such products do not provide the illiquidity premium that is inherent in private equity, which we estimate to explain about half of private equity returns, but they do provide a better way to approximate private equity-like returns than, say, investing in a broad market index.
In an environment where direct-to-consumer investment models continue to rise in importance, and as institutional investors increasingly worry about the liquidity of their investments, new products will be a core focus for asset managers. Liquid alts investments, including products that target private equity-like returns, will invariably be part of the new offerings.
JR Lowry, head of EMEA at State Street Global Exchange
This piece reflects the views of the author and does not represent the official views of State Street Global Exchange or State Street Corporation.