The upcoming arrival of retail investors in private markets, combined with economic headwinds and the need for technological innovation, have placed all private asset classes at an inflection point from where institutional parties need to make significant investments in efficiency, technology and skills, said a survey released on Monday.
Under the title ‘No Going Back; New Realities in Private Markets’, Boston-headquartered State Street reported on a survey it has conducted among nearly 480 large institutional investors from around the world. Growing retail interest in private markets is discussed throughout its report, which notes a need for IT investments and for upgrading skill sets in private investment at a time when macroeconomic conditions, defined by inflation, are not necessarily conducive for investments.
“The uncertain financial markets and pick-up in inflation are prompting even retail investors to look beyond the listed asset categories,” the State Street report said. “This peaking interest is met with support and resistance in equal measure. The question is not about ‘if’ but ‘how’ to make private markets accessible to retail investors balancing the level of sophistication and liquidity of the product.”
Continued growth seen
“The message has been loud and clear in the feedback from our clients: they do continue to expect to see growth in private markets and they intend to continue to invest in it,” said Jesse Cale, State Street’s global head of private markets product.
Luxembourg, recognised as a European and global hub for private markets, including equity, debt and real estate, also is set to widen access for retail investors. A key instrument here will be the European Long Term Investment Funds, known as Eltifs, which are widely expected to drive an uptake in private investments among ‘retail plus’ clients served by wealth managers.
Unlike public markets, with listed securities subject to stringent reporting rules, private markets do not require elaborate reporting. Although these products in Europe will also be subject to ESG reporting rules, along with financial reporting requirements, investors will mostly depend on the financial institutions offering the securities for data on the underlying investments. Most of these institutions are familiar with informing a relatively small number of professional investors and are not used to work with a significantly wider group of possibly thousands of retail investors.
Liquidity and data transparency
State Street noted that addressing liquidity and data transparency would be key to making private markets suitable for retail investors and described this as a “mounting challenge” for a major part of the financial sector that traditionally only served institutional investors like pension funds and insurance companies.
“Historically, the private market has been exclusive and largely been the preserve of institutional investors and high net worth individuals,” said State Street. “Developing an operational infrastructure was not a focus area. However, now with increasing adoption, institutions are realising the need to scale up their infrastructure.”
The complicated structure of private markets, with very distinct asset classes, makes it complicated. “Most firms lack the resources and know-how to scale. Having the domain expertise is key to scaling up,” said State Street.
Retail money ‘not an immediate solution’
Based on its survey, State Street noted that financial institutions should not regard retail money as “an immediate solution to an organisation’s structure problems”, although it could be a “a realistic source of capital in the future if the right circumstances were to develop.”
“The only way forward is improvement to operations and processes, and this requires significant advances in investment in efficiency, technology and skills,” the report said.
The use of data in private markets also needs to be improved and to mature further, like it has in public markets. “Really the data issue is around,” said Cole. “It’s just a lot of unstructured manual data maintained in lots of places and it just hasn’t matured as an infrastructure like has happened in the public markets.”