Is it possible to further open up private markets? Image: Photo by Lukas Blazek on Unsplash
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- Institutional investors and a limited group of individuals have long enjoyed the return and diversification benefits of private markets.
- Retail investors should be able to share in those benefits to help build their wealth and ensure long-term financial security, but this isn't as easy as it should be.
- Through the World Economic Forum’s Future of Capital Markets initiative, in collaboration with Accenture and chaired by Lazard, we gathered a group of industry experts to ask how we could broaden access to retail investors in a responsible way.
Institutional investors and a limited group of individuals have long enjoyed the return and diversification benefits of private markets. Retail investors, or individual investors, should be able to share in those benefits to help build their wealth and ensure long-term financial security. Yet, while broader access to private markets could offer opportunities it comes with risk. Private market investments are inherently complex, are less transparent than public market equivalents and are typically illiquid with long lock-up periods.
Through the World Economic Forum’s Future of Capital Markets initiative, in collaboration with Accenture and chaired by Lazard, we gathered a group of industry experts to ask how we could broaden access to retail investors in a responsible way. The white paper with our findings is published here. Here’s a summary of what we came up with.
How is the World Economic Forum ensuring sustainable global markets?
Exposure to private markets matter
Public markets have been central to the development of the global economy, but a significant shift is underway. More and more companies are favouring private markets. They're choosing to remain privately owned for extended periods, relying on private funding and postponing or even avoiding going public. As a result, the size of the private markets - the part of the global financial system where you can invest in things like private companies, real estate and other assets that aren’t traded on public stock exchanges – has ballooned and currently represents $9.6 trillion in assets.
This shift is having a significant impact on the global economy and financial returns. Private markets represent wealth creation opportunities, through enhanced returns, additional income generation and diversification of risk when compared to a pure public markets portfolio. These benefits are subject to fees, costs and liquidity lock-up periods.
Current exposure to private markets (through private equity, private credit, real estate and infrastructure) as part of a portfolio looks strikingly different for retail investors than for their wealthier counterparts. This is, in part, because of their limited ability to access private markets directly, or even indirectly. For individual investors, this can matter in terms of the overall wealth generation potential for your investments and to withstand periods of market turbulence.
While there are potential benefits to broadened access, risks remain for retail investors
While broader access to private markets could offer diversification and the potential for enhanced returns and income, the lack of transparency associated with private investments can make them unsuitable for retail investors.
Investing in a private asset typically means that an investor can’t liquidate quickly. In addition, these investments are typically costly with high fees and investment minimums that are beyond the reach of the average individual investor.
Retail investors are also a heterogeneous group and are not able to bear these risks in the same way. There is significant variation in the amount of money they have at their disposal to invest, financial education, risk-return appetite and willingness to bear the liquidity risks (i.e., longer lock up periods). This means that broadened access for many retail investors may not be appropriate. For example, on the lower investable assets range (mass market), investor protection and liquidity risk considerations are significant. In comparison, mass affluent and affluent investors have the opportunity and appetite for participation due to financial education, risk tolerance and use of financial advisers.
These investors lack access to suitable products and would benefit from better-informed financial advisers as it relates to private markets. The white paper we published discusses potential product solutions for different types of retail investors, ranging from managed solutions (more suitable for lower net worth) to bespoke and direct investments (more suitable for higher net worth).
There are also some potential wider market consequences that would need to be considered. For example, greater competition and valuation pressure, adverse selection risk, market fragmentation and regulatory challenges. In many cases, these risks exist in the public market context, however, how it could translate to the private markets maybe difficult to predict.
What would broadened access to private markets for retail investors look like?
Our work has laid out a vision for what this could look like. This includes rehauling education to be fit-for-purpose to meet the new needs of individuals and, more importantly, financial advisers. It includes improving the means of access points for investors (either through employer and retirement plans, online brokerage platforms or applications, through financial advisers or direct investment). It also calls for innovative products tailored to the needs of retail investors. Critically, it also lays out ways to improve the management of liquidity and the development of a secondary market.
These have been grouped into demand-side, supply-side and marketplace considerations that would need to be addressed to responsibly broaden access to retail investors.
Critically, these factors all interact and true progress will only be made if these are tackled in parallel through coalitions and public-private partnerships. None can be solved in isolation or by one stakeholder alone.
What needs to happen next?
The World Economic Forum’s report, Broadening Access to Private Markets, lays out some calls to action to make progress to broaden access. This includes:
For all stakeholders:
• Rethinking education and awareness-raising activities for key stakeholders – including, most importantly financial advisors and investors themselves
For industry players – including wealth management firms, brokerages, fintechs, infrastructure providers, fund managers and private equity:
• Tailor products to retail investors’ liquidity, investment horizon and return needs.
• Form industry consortiums to accelerate standardization.
• Simplify the investor journey.
• Invest and explore technological innovations.
For policy-makers and regulators:
• Address limits to on-ramps for retail investors and expand key access points.
• Create policy instruments aimed at increasing retail participation, keeping in mind investor protection considerations.
• Assess loosening constraints on private market exposure via managed solutions (e.g. pension funds).
For public-private partnership
• Standardize language, forms, reporting and processes.
• Support responsible data sharing.
You can find the white paper of the report, developed in collaboration with Accenture, Lazard, Apollo, AXA, Motive Partners, BMO Financial Group, Carta and Moonfare here.
Other contributing organisations include Broadridge, BNY Mellon, Deutsche Bank, Edward Jones, Grayscale Investments, J.P. Morgan, Julius Baer, New York Stock Exchange, Partners Group and Robinhood.
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The views expressed in this article are those of the author alone and not the World Economic Forum.
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