Democratising private markets: the march towards non-institutional investors

The world of private markets has traditionally been dominated by institutional investors. Those wishing to invest in alternative assets more often than not required millions (or tens of millions) in capital to do so. However, recent regulatory changes and advancements in technology have been the catalyst to democratise access to private markets, enabling a growing audience of non-institutional investors to deploy their capital in alternative assets. 

We took a look at the latest research from McKinsey’s Global Private Markets Review 2023 to understand what this means for financial institutions and their clients.

Why are more individual investors turning to private markets?

Investors, regardless of whether they’re institutional or not, are increasingly drawn to private markets. Their historic performance indicates the potential for higher returns, there is a lower correlation with volatile public markets, and they allow investors access to assets that would otherwise be out of reach.

Global regulatory changes and innovative investment structures are just two of the reasons why private investment opportunities are now able to be opened up to a wider audience of high net worth and retail investors. And, as the McKinsey report explains, many financial institutions are now developing strategies to take advantage of the commercial opportunity posed by the significant pool of capital available through private investors. 

Increased use of structured vehicles and feeder funds

More and more non-institutional investors are looking to alternative assets, and GPs are taking note.

To enable access to these opportunities, firms are making greater use of structured vehicles, with one of the most common being a feeder fund that aggregates commitments from several individual investors and then invests as a private partnership. 

Since launching Delio Structuring in 2021, we have seen a significant increase in the number of financial institutions that are using investment vehicles to reduce the minimum ticket size of deals. Ale Ricagno, Delio’s Head of Structuring, explains:

“Structured investment vehicles are a highly effective way for financial institutions to enable more of their clients to invest in alternative assets. Depending on the needs of the firm and their clients, structures can be designed to reduce the minimum investment required from each investor to as little as £5,000. This means that investment opportunities can be opened up to a mass retail market, rather than remaining the exclusive domain of only the most wealthy of individuals. 

“We’ve found that delivering these structured investment vehicles through Delio’s technology creates a compelling proposition for both institutions and investors. Digitising a traditionally manual process offers significant efficiency savings for the firm, while investors benefit from a much slicker client experience and access to the assets they crave.”

Technology accelerates democratisation

As investor demand increases and technology adoption continues to accelerate, it’s no surprise that financial institutions are leveraging digital tools to improve investor access and the  distribution of opportunities.

Digitising the investor journey is just one example, as it streamlines a traditionally slow, manual process and improves operational efficiency. However, the real game-changer is tokenization. This innovative technology is disrupting the traditional investment landscape by allowing asset managers to tokenize funds across various investment vehicles. It’s not just a buzzword, either – as McKinsey explains, two of the world’s largest asset management companies have already announced plans to tokenize funds across private equity, private credit, secondaries, and more.

This trend is only going to gain momentum as more GPs realise the benefits of tokenization, making it clear that technology will only have an increasingly important role to play in the world of alternative asset management.

To conclude…

With an estimated capital pool of $45tn at stake, it is clear that financial institutions must take the potential of non-institutional investors seriously when it comes to their private markets strategy. However, this shift is likely to cause some significant operational challenges for the industry. 

Technology will be instrumental in overcoming these, and firms should already be considering whether their digital infrastructure will be able to support this shift in strategy.