Private equity's next growth engine
Private markets have certainly enjoyed a boom time for much of the past decade. While macroeconomic circumstances caused activity to slow in 2022, Pitchbook estimates that the asset class had garnered a total of more than $12 trillion in AUM by the end of last year.1
In the case of private equity, institutional investors have largely created the momentum. However, we expect individual investors (either directly or through an intermediary) to pick up the baton from here and drive a significant proportion of the next stage of growth for private equity. Here’s why.
This investor segment is largely untapped not just by private equity, but by alternative asset managers in general. And since individuals hold around half of all global wealth, it's a deep pool in which to fish. According to a new report from Bain & Co2, of the approximate $275 trillion to $295 trillion global assets under management (AUM), individual investors hold roughly 50%, but they account for only 16% of the total invested in alternatives funds. For those alternative managers looking for new sources of capital in a bid to keep the positive momentum of the past few years going, this segment is an obvious target.
But it’s not just a one-way street. More and more wealthy individuals are turning to alternative investments in their search for consistent returns and diversification – tempted by the better return prospects often offered by private markets than by their traditional public equivalents.
In the same report, Bain says it expects that institutional capital allocated to alternative investments will grow 8% annually over the next decade, and for investment by individual investors to grow 12% over the same period.
Against this backdrop, there are several trends driving shifts and disruption in the accessibility of private markets. First, some of the leading and largest private equity managers have big ambitions, and equally big targets, to open up their offerings to individual investors. By doing so they can access a vast and untapped source of capital, which would not only boost their AUM but also widen their base of limited partners.
As previously mentioned, private equity has produced historically superior returns in comparison to public equities. This is also responsible for shifting investor preferences away from traditional markets. With private equity returning 14% globally over the past 25 years, compared to 7% for the MSCI World Index3, the change in dynamics is understandable.
Second, private equity offers individual investors another way to widen the exposure and spread risk in their portfolios, at a time when true diversification in the public markets has become increasingly difficult to come by. The pool of publicly listed companies has declined over recent years. A few big tech names now dominate the public market and only around 15% of companies with revenue over $100 million are publicly held.4 With so much of the economy closed off, private equity can potentially offer individual investors access to a broader investment universe and a compelling opportunity set.
Finally, many of the barriers to entry, which prevented individual investors from accessing private equity, no longer stand in their way. Regulatory changes in recent years and fewer liquidity constraints mean a broader range of individuals can now enjoy access to a market that was once the domain of only the wealthiest of the wealthy. Product and distribution innovation has also opened up the space to individuals. Many alternative asset managers are developing ‘go-to-market’ strategies for retail investors, while the creation of tech-enabled private market investment platforms is helping make investing much simpler.
The way forward
We are at an exciting stage in the evolution of the industry and as retail capital gains more traction we expect it to become an important source of fundraising for alternative managers. There are challenges though. Brand recognition among individuals for private equity and alternatives more generally is still developing and these investors may not have a full understanding of how the business model works.
For these reasons, private equity managers will need to invest heavily in investor education and continue to innovate in terms of products and services, and the way they distribute them. However, given the potential rewards, these are likely to be investments worth making.
1 2022 Annual Global Private Market Fundraising Report, Pitchbook
2 Global Private Equity Report 2023, Bain & Company, March 2023
3 Global Private Equity Report 2023, Bain & Company, March 2023
4 Global Private Equity Report 2023, Bain & Company, March 2023
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