What Happens When Private Markets Get Opened Up to the Masses?

Private markets are opening up, but at what cost?

Private market investments traditionally come with illiquidity and opacity, two things advisors and their clients prefer to avoid. Nonetheless, firms from JPMorgan to BlackRock to Goldman Sachs and beyond are looking to bring alternatives to the mass affluent segment via semi-liquid funds and certain kinds of ETFs. At the same time, recordkeepers like Empower and State Street are starting to offer alts in 401(k)s. US retail investors’ allocations to private capital could reach $2.4 trillion by 2030, according to Deloitte. 

However, that surge of mass affluent money could fundamentally change how private markets are regulated and ultimately how they perform. “Private investments offered to retail investors are unlikely to look anything like the ones offered to institutional investors or the ultra-high-net-worth clientele,” said Alex Caswell, founder of Wealth Script Advisors.

See Clearly

Many in the wealth industry feel the retail push is likely to prompt more oversight, providing investors with greater protection, flexibility and transparency:

• Transparency regarding valuation reporting and performance measures in private markets are top concerns for investment professionals, according to a CFA Institute report.
• Greater disclosure increases costs and administrative burdens, especially for smaller managers, though AI and automation can ease those challenges.

“The more asset managers want to go into 401(k)s, there’s naturally going to be a lot of pushback on the opacity,” said Jack Shannon, principal, equity strategies at Morningstar. “The SEC is going to want disclosure on valuations and holdings. If you pull a holding schedule for some of these funds, you can’t tell what the hell is in them. It’s just a bunch of LLCs with nondescript names.”

Be Like Water? Increased regulation could, however, hurt the potentially high returns that make private markets so attractive in the first place. “There’s going to have to be some level of illiquidity to make things work from a return perspective,” said Matt Malone, head of investment management at Opto Investments. “A lot of times, liquidity is actually a problem because everybody runs for the door at the same time.” 

Institutional investors, who formerly had exclusive run of private markets, aren’t excited about the surge of mass affluent money and its effects on illiquidity, either. Their concern is that private equity firms will prioritize retail investors at the expense of institutional investors, according to a white paper from the Institutional Limited Partners Association. 

Yeah, PE, don’t forget about the big guys.