Private Market ETFs May Have an Institutional Problem

Private market investments are more available than ever. So why aren’t retail investors buying?

Exchange-traded funds designed to give everyday investors access to private markets, and some of the hottest IPOs on the market, are attracting tons of institutional interest. Assets in State Street’s Private Credit Fund (PRIV) grew by $740 million in the first quarter, with most of that coming from a single Texas endowment fund, which put hundreds of millions into the product in a single day in February. Some funds may even be capping institutional assets. The data show that rather than giving average investors access to private markets, historically only available to institutions, these funds just may be one more tool for the latter.

“[Capping institutional inflows] sounds to me like an artificial attempt at forcing more retail exposure in the market,” said David Shapiro, Co-Founder & CEO of OpenVC. “In reality, if you look at demand curves for some of these assets, it’s a lot of retail … because of the nature of them being fundamentally locked out of this asset class.”

Night Cap

Why might institutional investments not spell success for ETFs looking to build retail interest? One reason may be that institutional buyers might be more willing to pay for access to certain companies. “Most of these fund strategies are pretty active strategies,” Shapiro said. “They charge high fees relative to comparable index fund-style ETFs, and they’re passing those high fee loads off onto an increasingly retail audience.”

That hasn’t stopped investors from expressing interest, according to recent ETF trends data from iShares:

• Six percent of survey respondents claim they plan on adding private markets investments to their portfolio.
• Demand for private markets among clients has surged from April to June of this year.

Still, it’s important to note what form these new private markets wrappers will take, and Shapiro predicts more open-ended funds are to come, but it could also be more closed-end fund wrappers or liquid ETFs, such as the Baron First Principles ETF (RONB).

Two Roads Diverged: Shapiro expects that retail demand will eventually catch up to institutional interest. “We’ll see if the retail-institutional inflow split continues to diverge more toward institutions. I don’t think that will happen given the demand we’ve been seeing from retail,” he said. “Ultimately, the market will shake out to a more typical split expected of any other public equities ETF.”