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ELTIF, Private Markets

Disintermediation in the Private Markets

The structure of the public capital market has changed significantly over the last 30 years, primarily due to rapid technological progress. In the same dynamic, it will also change the private markets now. Digitalization not only opens new opportunities for investors, but also for the composition of investment products on the provider side as well as the management of these assets.

Straight-through processing (STP), which is already ubiquitous in the public markets, will also reduce costs in the private markets, make processes more efficient and eliminate errors caused by manual processing.

Redefining Value Creation

This also benefits the fund value chain, i.e. the entire value chain from asset manager to investor and back again. The disintermediation made possible by digitalization ensures a seamless connection between all participants and can simplify or even completely take over various aspects as required. This is a major advantage, especially in the cross-border fund business, which in itself has a very complex structure already, but for which even more intermediaries will be needed than in the domestic business, e.g. for the ELTIF 2.0. By applying a sustainable technological infrastructure, complexity can be significantly reduced, and greater added value can be achieved.

In concrete terms, this means that the various market participants can choose their preferred form of disintermediation, the simplification and acceleration of processes. For example, if desired by the asset manager private investors could invest directly in its private market funds.

Distribution Platforms as Central Points of Contact

Digital distribution platforms offer a central point of contact for investors to obtain information about the various investment products, such as the ELTIF, to compare their investment options and to invest directly. For one, such platforms can use data analysis tools to create tailored investment proposals. But even more, asset managers as well as distributors can use this data to draw conclusions about investor behavior and optimize both products and product advice.

In a first step, the connected distributors can onboard private investors via automated KYC/AML processes and include them in their digital investment and advisory suite. This previously involved considerable time and personnel costs due to manual processing. In addition to automated identity verification, investment flows are also seamlessly integrated, opening the door to complex private market funds.

In a nominee structure, a central distribution partner can process a large number of distributors and the orders for an issuer or asset manager not based in Germany. Such a structure gives the product provider access to new markets without having to set up its own distribution structures in other European countries.

Disintermediation for Special Features in Private Markets

Above all, digitalization will take the settlement process in the private markets to another level. Such automated settlement will not only enable independent fund platforms, for example, to speed up private markets investment order flow, but to also make this more secure and custodial. Depositable private market products, such as ELTIFs, allow for cumulative custody in one place, removing the complexity of multiple custodians for non-depositable and depositable products from the private respective public markets. This simplification enables more fund platforms to expand their product portfolio with new attractive investment products for their clients.

For capital calls, disintermediation will be almost revolutionary – even this special feature of the private markets will be STP capable. While capital calls were previously only realized analog, solution providers are preparing fully automated processes: Soon, all capital commitments of a fund can be collected in one place and the capital can then be addressed and collected standardized via the respective capital call. The cost and time savings, combined with strong process security, offer enormous potential beyond the ELTIF for most private markets funds set up accordingly.

Institutional Level Interaction

Digital infrastructure in the private markets, and in the first step with the ELTIF, offers enormous, individual optimization potential for all market participants through disintermediation. By simplifying and accelerating a wide range of processes, everyone can benefit in their own way from greater efficiency, higher transparency, and better cost management. Whether completely end-to-end or only for defined individual processes in the value chain, issuers and platforms can decide for themselves.

The resulting interaction between financial institutions and private investors at institutional level will substantially change the private markets. As first movers, asset managers, banks, and distributors can tap into the potential of disintermediation and thereby secure a head start in attracting new investor groups.