Institutional investors in private equity have come out against the drive to offer retail clients access to the lucrative asset class, according to a new survey.
Larger investors, such as pension funds, are against private equity opening up to the retail market, with 73% saying the risks make it unsuitable for direct investment by less sophisticated investors, according to the latest edition of Coller Capital’s Private Equity Barometer.
The secondaries specialist surveyed 113 investors based in North America, Europe and Asia-Pacific, including pension plans, sovereign wealth funds and asset managers.
Survey respondents said they believed more retail money will flow into private equity globally in the next five years, with 41% of European investors expecting such a development, but they do not think it is a sensible move.
“For institutional investors whose mandate is specifically investing in private equity, they are concerned about all types of competition and any threat preventing them from deploying all the capital they need to put to work,” Francois Aguerre, partner, co-head of origination at Coller, told Private Equity News.
“Because retail investors are not structurally able to get organised as a group, they are an attractive source of capital for GPs [private equity firms], as [they are] less likely to create a bargaining position.”
The US Securities and Exchange Commission has been considering changing the rules to safely expand retail investor access to private equity. This would not only benefit ordinary investors, who are looking for higher return investments in a low yield environment, but it would also open up the private equity industry to a brand new pool of capital.
Currently, rules in the US and Europe only allow sophisticated wealthy investors access to the asset class, with the goal of protecting those with less money and investing experience from risky strategies.
In the UK, concerns over retail investor access to illiquid private equity funds has grown in the last year following a spate of high profile blow ups in the asset management industry. The fall of star fund manager Neil Woodford has not provided a great advertisement for allowing small investors to put large sums into unquoted companies.
The mismatch between the convention that retail funds must offer daily liquidity, and the need for investors in unlisted firms to be prepared to lock up capital for longer periods, have also been raised by Bank of England governor Mark Carney and the head of the Financial Conduct Authority Andrew Bailey.
The Institutional Limited Partners Association — the private equity investor group — previously warned that allowing retail capital into the private markets would result in reduced returns.
Returns are also threatened due to the macroeconomic environment and high asset prices, according to Coller’s survey. Nine out of 10 limited partners acknowledge significant risks to their medium-term private equity performance.
Almost all of the investors expect to see a significant divergence in performance between funds when the economic cycle turns, the survey suggested.
Aguerre added: “The Barometer shows in a number of findings that investors feel we’re close to the peak of the cycle. It means investors start to get more anxious about the type of investments they make. Forecasting potentially a downturn, investors are also looking at slowing the commitment pace of their investments which have been flavour of the month, like private debt.”