Private equity is still largely seen as an exclusive club for professional investors. Retail investors can only take part by investing remotely, for example by buying shares in a management company that has a public listing. In the coming years this is expected to change as more investors, in particular those who are considered High Net Worth Individuals, can meet the legal thresholds and can tap into the private equity pool, also thanks to new digital efforts to make these investments more scalable.
The Luxembourg Private Equity Association, LPEA, recently hosted an in-person debate on widening access to PE for HNWI’s and family offices, moderated by Alexandre Hector of KPMG Luxembourg. A study by Boston Consulting Group last March projected that 10 percent of PE funding will come from HNWIs, underpinning growth projections of 20 percent per year for the next five years. Technology - tokenization for example - is but one aspect. A desire to offer clients a wider range of investment options is another.
“It’s a trend that will remain in the coming years,” said Mathieu Perfetti, head of PE at Threestones Capital when introducing the panel. “We need to make it smart, support investors and use technology to make it scalable.”
“Today, the question is very much about how to invest for clients, more than why invest in private equity,” said Oliver Dauman at CFM Indosuez Wealth, which manages more than 5 billion euro in private assets. “So there is an appetite and there is a responsibility for wealth management. It is not just an opportunity but there also is a responsibility to properly handle this.”
Increasingly popular also in Luxembourg
Private equity is growing in importance also in the Luxembourg financial ecosystem. When it comes to alternative investments and providing companies with long-term capital, the popularity of vehicles such as Raifs and Eltifs is expected to growth further in the coming years. Such vehicles however are only accessible to qualified professional investors, or private investors who can commit significant amounts as a long term investment and meet investment threshold criteria set by regulator CSSF.
Matching a complex, long-term vehicle and matching that with the particular needs of a client often can be particularly challenging in private equity. It can become even more difficult when the client is a family office, said Manuel San Salvador, founder and managing partner at Antwort Capital, a Luxembourg firm that supports private equity funds. Determining valuations - mark to market - is another aspect to be considered,
“This really, really is a challenge,” San Salvador said. “ It takes a lot of time to create your own vehicle with your funds. And after that, when you create your own vehicle, you have to fit this with clients. And then you have to have a relationship with that client base during seven to ten years.”
Tom Slocock, head of international product development at iCapital Network, which manages some 130 billion dollars in about 1000 funds said the industry needs to make sure that it can properly offer private equity as an asset class to investors who may not have the knowledge to properly understand certain types of investments.
“Education is critical,” Slocock said, noting “a gap in the knowledge base at client level.”
Scaling up only possible with technology
iCapital these days is launching three to four new PE funds per week. Technology, Slocock said, will be key to make sure that an increasingly large client base can handle the huge number of documents in relation to these products. “You’re not going to get to that sort of scale without technology,” he said.
Antwort’s San Salvador agreed on the need to properly leverage technology if private equity is to be successful for a wider range of clients. “Performance is not why a client leaves you. It’s because of a lack of support, a lack of access,” he said. “You need technology. It is absolutely key.”
Transparency on liquidity also is to be considered when offering PE investments to a wider group of clients. PE investments are not as liquid as publicly traded financial instruments, which means selling them may be particularly difficult when there is no buyer available. “In terms of liquidity, we are not there yet,” said Indosuez’ Dauman.
Liquidity is there when you don’t need it
“We have to be very upfront to clients,” said iCapital’s Slocock. “Liquidity is there when you do not need it. The question is: is it there when you do need it?”
Around the table, the experts in the discussion were reluctant on the possibilities of innovations such as through tokenization, which elsewhere in the investment industry is seen as a possible way to give a wider group of investors access to for example debt pools or infrastructure investments. The volatility in the bitcoin market does enhance confidence.
Slocock sees a potential train wreck. Retail investors do “not have a good track record of self restraint. We have very good guard rails, but such products are sold to people who do not know how to drive. The outcome is a train wreck,” he said.
Education is key, the panel agreed, in particular in the secondary market. In the private equity market “you need to understand what you are buying,” said San Salvador. “It can be very very dangerous.”
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