Broadening access to private markets can serve as a catalyst to improving financial inclusion. Image: Getty Images/iStockphoto
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- Investing in a broad and diverse set of financial products can serve as a catalyst for wealth creation and empower individual investors.
- But many retail investors do not have exposure to the full spectrum of alternative 'asset classes' or 'private market' opportunities.
- Here's how we can increase financial education and opportunities by addressing the challenges of retail access to private markets.
The opportunity to invest in a broad and diverse set of financial products is a fundamental building block for financial inclusion – it can serve as a catalyst for wealth creation, diversification and financial gains, while simultaneously empowering investors to participate in economic activity and demonstrate their financial acumen.
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Retail investors today, however, do not have exposure to the full spectrum of investment opportunities with “alternative” asset classes or “private market” opportunities being under-represented in portfolios relative to the portfolios of institutional investors.
We need to do more to increase education and opportunities for access, but must do so in a manner that ensures we are educating investors, balancing risks, providing disclosure and ensuring products are suitable, as outlined in the Broadening Access to Private Markets report, produced in collaboration with Accenture and the World Economic Forum.
The growth of private markets
Over the past two decades, we have seen massive growth in “alternative” asset classes or “private market” products, which include private equity, private credit, real estate and infrastructure sub-asset classes. “Private market” assets under management (AUM) have increased nearly ten-fold – from about $1.3 trillion in 2005 to about $13 trillion in 2022.
These alternative assets have risen in popularity because of their potential to provide enhanced portfolio returns and diversification benefits that improve overall risk-return.
An analysis based upon data gathered by Preqin shows that private market asset classes have outperformed their public market equivalents over the past decade:
Similarly, work by J.P. Morgan has suggested that moving from a traditional investment mix of 80% equities and 20% bonds to a more diversified allocation that includes alternative asset classes can significantly reduce volatility while increasing overall returns.
Historical lack of exposure to private markets
Despite these potential benefits, exposure and access to high-quality private market investments has not crossed over to retail investors, who historically have focused their investment dollars on traditional instruments such as publicly-traded stocks and bonds.
While mass market investors with $0-$100,000 of net worth have significant liquidity risk considerations and therefore stringent investor protections, there remains ample opportunity for retail investors denoted as mass affluent and above (greater than $100,000 of net worth) to increase their access to private markets.
A lack of education about these private asset classes, stringent regulations, high investment minimums, lack of transparency and liquidity constraints have historically created barriers to mainstream investors participating and investing in these important asset classes.
Even if these products were more approachable to investors, there are systemic advantages that institutional investors have given their size and ability to compete for high-performing assets.
Making private markets more inclusive
More work needs to be done across the investing ecosystem to address the challenges of retail access to private markets. We welcome creative thinking on how to expand access to private markets, but believe there are actions key stakeholders can do to increase access:
- Financial advisors can raise product awareness through investor education that is supported by better training and product knowledge. Of course, these efforts need to be supported by guardrails that contemplate risk and suitability.
- Policy-makers should continue to evolve and tailor the accredited investor definition to ensure it is not overly restrictive and allows those that are financially literate or adequately sophisticated to invest.
How is the World Economic Forum improving the global financial system?
- The creators of investment products should consider tailoring existing products or creating innovative new products to expand access. Reducing investment minimums and increasing liquidity by permitting partial liquidity or trading on secondary markets could make products more accessible and bite-size.
- The industry can come together to create standardized products or, at the very least, align on reporting structures that have a standardized format that is comparable across products and more easily digestible by investors.
With the right guardrails and resources in place, private markets can be inclusive, not exclusive. More importantly, shared access to attractive asset classes can enhance wealth creation for retail investors and support long-term economic growth.
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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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