Digitization enables Participation
in Private Capital Markets
Individual investors in the private capital market
Especially in times of difficult investment markets, investors are looking for new investment opportunities — and providers of capital market products for new investor groups. High inflation rates are juxtaposed with market uncertainties and low savings interest rates (even though positive ones by now). The frequency of global and regional trouble spots in recent years has shaken up risk-return ratios in traditional investments, and investment strategies must be readjusted.
In this market environment individual investors may be taking a deeper look into the private capital market — summarized under the trend “retailization”. Changing regulatory frameworks, but above all the progress of digital possibilities in the financial sector, offer new investment areas.
The private capital market differentiates itself from its public capital market counterpart for instance by higher investment levels to access it; in particular, minimum investment amounts of EUR 1 million and above make for a “natural” selection. Thus, for example, investments in private equity funds have been almost exclusively reserved for institutional and semi-professional investors. With new technologies and digitization entering the financial markets these investments can be made possible for individual investors — and thus opening up new target groups for providers of these products.
Private capital market continues to grow
According to a study by Preqin, a leading provider of investment data in alternative assets, the global private capital market is expected to grow to USD 18 trillion by 2027. The share of individual investors is expected to remain in the single digits for the time being, but will nevertheless grow significantly—proportionally, but mainly in overall numbers. And there is more to come, with US private equity giant BlackRock once again leading the way: Since opening up to individual investors a decade ago, their share of assets under management in alternative investments has increased to 20 percent and could rise to 50 percent in the next few years.
Germany lags behind other European markets
Germany in particular still has enormous potential in this area, as a study by the Frankfurt School of Finance & Management commissioned by portagon has shown: Approximately 40 percent of Germans hold their financial assets in cash and bank deposits. The European average is only 33 percent. Given that Germans have larger assets on average, retailization offers providers of alternative and secure investments good to very good growth opportunities by means of suitable, digitized access points.
Private capital market outpaces public capital market
Over the past 20 years, private capital markets have achieved average annual growth of 14 percent. In the same time, the benchmark MSCI World index has offered its investors an annual return of 7 percent—not a satisfactory number with inflation currently at 9 to 10 percent. “The resilience of some private market asset classes has shone through,” David Seex, Co-Head of Private Asset Sales and Head of Private Asset Solutions at Schroders Capital, analyzes in the Preqin study. While the public capital market has been hit hard by the Covid 19 pandemic and rising energy prices, it has fueled demand for suitable investment products in the private capital market.
Challenge: Succeeding generations have new investment goals
Seex sees four main factors impacting the further democratization of the private capital markets:
Investment perspective: Communication and technology have brought the world closer together, but in many ways, this makes investment and asset selection more challenging. With the abundance of information, investors increasingly need help with their soundings.
Management: Managing a portfolio, especially in the private capital markets, is very costly due to the complicated consideration of capital outflows, distributions as well as currency and reporting cycles. Yet, investors value efficiency.
Access: Conducting due diligence and, more importantly, accessing the best investment opportunities is difficult. Constraints are less about high minimums and more about securing capacity in the first place.
Diversification: Investors are well-advised to diversify in many ways — in investment strategy and asset classes. Building and maintaining a portfolio with a healthy risk/return ratio depends on the factors mentioned above.
In addition, two major shifts in the perception of investments made can be seen: First, there is a move away from a focus purely on asset classes to a greater focus on expected returns. Second, investors are determining the important trend toward more “sustainability and impact,” which has an increasingly strong influence on their investment decisions
Investment hurdles lowered by digital solutions
Many asset managers and private equity managers are currently still reluctant to accept investments of less than USD 1 million, e.g. from UHNWIs, HNWIS, family offices and other individual investors, as this involves too much administrative effort with the current technical means. However, this gets easier with the new opportunities provided by technology and digitalization: Smart fintech solutions enable the automation of onboarding processes, provide access to various investments as well as asset classes in one place all via browser-based and MiFID-compliant software solutions. This reduces transaction costs while increasing the selection of investment products with higher transparency—highly complex financial products can be efficiently accessed by a wider group of investors for product providers.
The first well-known fund managers are already using these innovations to their advantage, and a strong trend toward retailization through digitization is emerging in the entire private capital market for 2023.