Around half of total global assets under management are held by individual investors, yet less than a fifth of this capital is allocated to alternative assets, according to Bain & Company's 2023 Global Private Equity Report. Private equity managers are hoping to change that.

Ropes & Gray partners Tom Alabaster, Eva Carman, Michael Doherty, Eve Ellis, Brynn Rail, Bob Rivollier and I examined – in this article– the market forces behind the push to "democratize" private equity (PE) and the focus of PE managers on raising more capital from individual investors and retirement plans.

Paving the road to individual investment in alternative assets

As the institutional market matures, investment from individuals will be crucial for sustaining the industry's upward trajectory. The world's largest alternative asset managers have signaled their determination to tap into this private wealth opportunity, and individual investors have strong appetite to build their exposure in this space.

In the U.S. and Europe, there are some pathways in place for managers to reach individual investors, although within limited parameters. In the U.S., individual investors with "qualified purchaser" status (investments of USD$5 million or more) are allowed to make allocations to alternative assets, while business development companies (BDCs) and interval funds provide other routes for U.S. investors into various alternative assets. In Europe, the eligibility criteria for individual investors to invest in alternative assets varies between jurisdictions, but individuals must generally demonstrate a certain level of wealth and sufficient investment expertise.

Tapping into retirement capital

Managers are also exploring ways to access defined contribution pension fund capital. Some progress has been made in this area. These developments are promising but sponsors and defined contribution retirement plans are still testing the waters. There is a long way to go before managers will be able to raise capital from defined contribution pension schemes at scale.

Navigating historic regulatory and operational hurdles

Although various frameworks already provide sponsors with pathways into the retail and private wealth markets, accessing these new pools of individual capital presents significant operational and regulatory challenges. Managing large numbers of individual investors with certain liquidity expectations requires a very different skill set and approach to investor relations.

Managers and advisers must also navigate material litigation risk when seeking capital from retirement plans and retail investors. Moreover, raising funds through a feeder or third-party distributor can give rise to a host of potential practices that may become the focus of scrutiny by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Finding different options and structures

Managers remain in the very early stages of coming to grips with these obstacles and testing which structures present the best routes to market, address the liquidity requirements of retail and retirement investors, and reduce downside litigation and regulatory risk. Alternative asset managers still have a long way to go to deliver on the vast potential that retail, private wealth, and defined contribution retirement plans hold for the industry. But momentum is building, and these pools of capital will become increasingly important for the industry's long-term growth.

Looking ahead

Private equity managers are exploring ways to raise capital from individual investors and defined contribution pension plans with more intensity and focus than ever before – but have yet to fully capitalize on these untapped pools of capital. They are exploring all options and testing the waters for the best structures to raise funds from individuals and workplace pension plans. Even with complexities and obstacles to deal with, we're at the beginning stages of what is a tremendous opportunity.

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"If you look at investment opportunities from the perspective of the individual investor, the number of public companies has roughly halved during the last 20 years, and there has been limited opportunity for individuals to diversify their portfolios and gain exposure to companies earlier in their growth cycles, before they may go public. There is genuine appetite from individual investors to change that."

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