The traditional private equity world has realised only in the past two years that creating products specifically for wealth and retail channels is going to be a huge area of growth over the next 10 to 15 years. Europe, said Tarun Nagpal, founder of S64 Capital Innovation, will be the “next frontier” in mainstreaming private equity for retail investors.
Nagpal (photo) is founder of S64, a private markets business formed out of the core structuring solutions platform and distribution team from the former Deutsche Bank business he used to run until 2018. S64 employs 50 people and is present in several international locations including Luxembourg. He told Investment Officer that it has “multiple different platforms operating in Luxembourg and is the biggest manufacturer of the Eltif.”
High net worth investors should have an allocation to private equity in the range between 5 per cent and 20 per cent, according to the financial market view Nagpal cited. “This has never really materialised… in a meaningful way up until very recently”, driven to the then-low interest rate environment and the “300 basis points of returns” on offer from private equity led to “a very significant desire within the private banking world to actually be able to advise and offer products to end investors.” That was what he described as the demand side of the equation.
Niche part
On the supply side, however, “the Apollos, KKR, Blackstone” private equity firms viewed making their products available to high net worth channels as a “very niche part of their offering”, said Nagpal. “What they were not really looking to do was create products specifically for wealth and retail channels.”
This has however, in Nagpal’s view, changed dramatically over the past two years. What’s resulted is that “the supply and the demand side have really moved very fervently toward each other.” He explained that traditionally, private equity products have only been available to MiFiD classified professional investors. “That is a very small universe, in most private banks.” Most of their investors, even though they’re rich and sophisticated clients, are MifiD retail classified.
This has made the Eltif the only thing that fits into that landscape, because it’s the only product that’s MifiD retailable, on a pan-European basis under a passported regime.
Broader set
Banks have come in on the demand side, Nagpal explained, wanting to get into or to expand their private equity offer to a much broader set of clients. He listed Italy, Spain, France and Germany where there are several newer banks wanting to offer their MifiD retail clients these products.
Speaking about the criticism of the earlier Eltif, Nagpal said that “We all know that the restrictions were creating a little bit of friction in easing the two ends of the equation together.” He resisted, however, any negative evaluation of the earlier version. “It’s essentially going to oil a machine that had already started to move … it’s really oiling the wheels to make that process a lot more efficient, now, a lot more efficient”.
Europe is trailing behind the other big blocks, said Nagpal, pointing to the US being “really quite an advanced market in retail private equity” and Asia having “grown very quickly over the past four years.” Europe will be “the next frontier, in terms of the mainstreaming of this product,” he said. “The Eltif, I think, will be a very critical part of that.”
Tough sell
On the question of liquidity and the retail investor, Nagpal conceded that a “10 or 12 year product with zero liquidity is a much more difficult product to position with these types of clients.”
He pointed to the huge adoption in the US of what are considered semi-liquid products, with limited windows of quarterly liquidity. “It’s been a very, very big market in the US in retailable wrappers.”
The Eltif, he pointed out, was originally designed to be as it is described by its name – a long term investment fund. “So it’s not really designed to permit lots of liquidity in it.” He described what saw as an argument over liquidity in this vehicle.
Artificial liquidity
One side says “you don’t actually want to pollute it with too much artificial liquidity, because you’re going to end up with the kind of problems we’ve seen in UCITS and hedge funds … because if there’s not enough true liquidity in the underlying investments, by creating some kind of synthetic liquidity that’s going to be potentially something could lead to problems down the road.
The other side comes from private equity managers who’ve successfully delivered these semi-liquid products into other markets are now quite well positioned to do so with the Eltif. He said that dealing with individual client change of circumstance – death, divorce, accidents – is “potentially a good thing to permit in these products.”
“I think the Eltif, the new 2.0 actually does go quite some way in permitting that type of liquidity, potentially.”
Related articles on Investment Officer Luxembourg:
- Efama: Eltif 2.0 contains solutions to liquidity issues
- Lack of liquidity not seen as show-stopper for Eltif 2.0
- ‘Liquidity remains an issue in the new Eltif framework’