More lenient EU regulations are about to make it possible for providers to offer private investment funds to private investors. Private products such as semi-liquid funds and European Long Term Investment Funds, or Eltifs - which can be marketed also to retail clients under a European passport, often via Luxembourg - will gradually change the private equity landscape. “The split that the market currently finds itself in will then be resolved,” said Wim Nagler, head of institutional clients at Schroders.
In an interview, Nagler spoke of an “almost desperate wealth segment” that wants access to private markets but often cannot because of restrictions that still apply..
Until recently, it was difficult for individuals to invest in private markets. “For thirty, forty years investing in private was only possible for institutions,” said Nagler. “They never ‘die’ and have an infinite horizon. But if you are a private person, the situation is different. A divorce, death or other circumstances can mean that you suddenly have to sell your investments. With a product that has been illiquid for ten years or so, that is problematic.”
Semi-liquid funds
Yet a change is definitely taking place, Nagler noted, with products emerging that are tailored towards private markets: semi-liquid funds where investors can enter and exit monthly and quarterly.
This type of fund invests later than traditional funds do, in funds that are already almost fully invested. With traditional funds, the search for suitable investments starts a few years down the line, so the money is invested step by step and therefore withdrawn from the end investor. Nagler: “With semi-liquid funds, you miss the first years of value creation, so you will end up with a slightly lower return. But with them you buy the possibility and the peace of mind that you can get out if necessary.”
Nagler historically said he estimated the net return for small and mid-cap buyouts to be around 14 to 15 percent in Europe, and for the semi-liquid form at around 12 percent. In addition to the lower value creation, the lower return is also caused by the largest cash position of semi-liquid funds, as these have to offer investors the opportunity to exit.
Eltifs so far largely ignored
Meanwhile, Europe is gearing up for a loosening of regulations around Eltifs, the vehicle launched in 2015 that can also provide ‘ordinary’ retail investors with exposure to alternatives. According to Nagler, a further expansion of the offering in private markets for private investors is in the cards.
So far, the Eltif vehicle has been largely neglected. Nagler outlines three reasons for this: the entry threshold of 10,000 euros, the required closed-end structure and the restriction that investments can almost only be made in Europe. The latter sounds very logical when you consider that the vehicle is trying to be an answer to the problems SMEs have in attracting long-term capital in addition to their bank financing. But for private equity, a market mainly in America and Asia, this makes it difficult to diversify holdings.
A European consultation is currently underway, which aims to relax the rules. The plan is to increase the accessibility for private individuals by lifting the 10,000 euro limit, abandoning the focus on Europe and relaxing the liquidity requirement.
This would finally create an instrument in which private individuals could invest, because, as Nagler said, they can now theoretically do so via an ETF or via a semi-liquid fund, but reality is tough. An Eltif remains difficult because of the entry threshold and its closed-end structure; and a semi-liquid fund remains hard because an investor has to declare that he/she is a professional. “Financial intermediaries don’t just let you sign that and often you have to have enough assets and/or give a discretionary mandate. This is difficult for smaller assets,” Nagler said.
Schroder to offer Eltif from 2023
Nagler speaks of “a split” in which the market now finds itself, which will hopefully be resolved in 2024 with the relaxation of the rules. Schroders has already started building an Eltif, next to the four semi-liquid funds the asset manager offers in smallcaps and medium buyouts (€1bn in size) and in venture capital (€100m in size), among others.
The Eltif, which will come to the market in the first quarter of 2023, will invest in small- and mid-caps. Nagler prefers not to give a target return, but if he makes a ‘conservative assumption based on the past’, an investor might be able to double his capital over the entire term.
Market sentiment has little influence here, he said. “You buy a small company, keep it for seven years while it grows and increases in value. Normally, you sell such a company for a higher price. The fluctuations of the public markets play a less important role here.”
This article originally appeared on InvestmentOfficer.nl.