Through various legislative acts over the past 10-15 years, the EU’s push to democratise private markets has transformed how private equity does business, with a heavy helping of technology and fund management tools allowing for what could be a massive influx of smaller-denominated investors. Market participants are feeling their way forward into the new paradigm, some being quite certain that change has now come in the impending form of the new European Long-term Investment Fund. Others remain cautious about how Ucits investors will react to illiquid assets.
“This whole – I like to call it the rebirth of the Eltif under the 2.0 rules – is really a product enabler,” said iCapital managing director Jocelyn Pidoux . “And we at iCapital see ourselves as enablers in bringing private funds to a broader audience. And with our technology and access platforms, this is a complement to the Eltif.”
Pidoux spoke of her company’s “three-fold mission” to give wealth managers, GPs and asset managers access to “a wider pool of clients on the GP side or assets into private markets from the wealth manager’s point of view.” The firm is doing this through a technology platform and a focus on providing educational opportunities “to ensure that clients understand their investments.”
Smaller tickets
The firm’s end-to-end technology platform is necessary “because with smaller-sized tickets comes larger volumes. And the need to address the volume with technology allows scale of the product and a wider business opportunity,” said Pidoux, the managing director for international product development and structuring at iCapital, speaking at a recent Eltif event organised by the Apex Group.
“Wealth and even retail investors, they have not had accessibility to private equity and private assets in general,” explained Rainer Ender, head of private equity at Schroders Capital, in an Investment Officer interview. “That democratisation of private equity, focussing on primary equity, obviously, has had a very strong momentum and drive.”
Ender explained that his firm has two main types of investment products addressing this need. One, he said, is a semi-liquid evergreen vehicle. It requires a subscription, and if the investor wants to get out of the investment, if their request meets the limited cash-out conditions, they have to resign and wait out the notice period.
Democratised products
The other he described as a closed-ended fund under an Eltif structure, requiring an up-front investment, with the fund’s ambition to be fully done in two years, with the distributions coming back as with a normal, limited partnership.
Matthias Kerbusch, a partner at Dechert (Luxembourg) LLP laid out how the Eltif can be integrated with existing investment structures. He mentioned an Eltif SIF, an Eltif Raif and an Eltif Part 2 UCI fund. “I think the important thing to retain is if you’re looking for your true retail investor who wants to invest 100 or 1000 euros, you’re probably going to go with the Eltif Part 2 UCI,” he said.
Aimed at professional investors
Pidoux from iCapital took gentle issue with this, stating that “the UCI Part 2 is still a fund that is really aimed at professional investors and is limited in its distribution to an end client.”
“If you take an Eltif that will be passport-able across the EU to retail, that’s going to open up a new set of distribution and a new set of clients into a banks’ for example retail segment, which is currently pretty much untapped as far as it relates to private markets or alternative investment funds,” she said.
But this new market for private markets will require the industry to change. “When we talk about the Eltif in its new format, GPs won’t be able to service these products in the traditional way,” she said, explaining that in the new market, a variety of players will enter the value chain. This she said, explains why there will be “an increase for stakeholders in the value chain and for the Eltif in relation to the retail audience.”
Dinosaur behaviours
Ender of Schroders Capital admitted that if there’s one thing he criticised private equity for, “it’s for their own dinosaur behaviours, compared to the digitisation of operations.”
“The industry must change,” Ender said. “I think it’s being addressed slowly but too slow. Nobody enjoys the workload with it, but it’s still the norm.”
Words of caution
All this enthusiasm for democratisation has to keep in mind the issue of “fungibility” or the ability to transact. In other words, a concern that investors might not be ready for lower levels of liquidity than is found in UCITS.
“As you get retail investors to commit themselves to an investment of maybe 5 years or 10 years in length, without proper advice and guidance, this could lead to some problems, in my view,” said Arnaud Gerard, Managing Director of FundRock Distribution.