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ELTIF, Private Markets

All Eyes on the Private Capital Market: New Opportunities for Investors and Fund Issuers

Addressing margin pressure through new customer segments: leveraging more flexible regulations, new products, and digital distribution channels.

In search of lucrative returns, more and more wealthy individual investors are setting their eyes on the private capital market. At the same time, changing regulations and an increasing number of digital options are opening up new groups of individual investors for product providers such as asset managers, fund companies, and other issuers.

Private Markets in Focus: Opportunities for Investors and Fund Providers

In the private capital market, the range of investment opportunities and product offerings is almost as large as in the public capital market. While private equity and venture capital are often mentioned when looking at the private capital market, it also includes real estate, investments in infrastructure, commodities, natural resources, and other tangible assets, as well as non-listed debt capital. In recent years, cryptocurrencies and “non-fungible tokens” (NFTs), which are the digital representation of ownership of digital artworks or investments in traditional art, music rights, or collectibles, have also increasingly been seen as further alternative investments.

The Private Capital Market as the Actual Economic Driver

In the public perception, the private capital market plays a subordinate role. But appearances are deceptive: While the securities of around 550 companies are traded on the Frankfurt Stock Exchange, significantly more companies finance themselves directly through banks or the private capital markets. The private capital market is increasingly generating interest among new groups of investors who are keen to discover its “hidden potential” and are now able to do so: This is mainly due to new products, new technologies and new distribution channels opening up new paths for companies, intermediaries and investors. A good example of this is the ELTIF reform, which was only recently adopted by the EU Parliament in February, which offers new opportunities to all market participants: product providers as well as distribution channels are enabled to provide investors with easier access to the private capital market by loosening extremely time-consuming bureaucratic hurdles. This is confirmed by analyst firm Scope in its latest study on the ELTIF market, even going so far as to say that “the ELTIF will be the vehicle that will establish itself as the standard in the European private market investment market for private clients.” With the ELTIF market, which has existed since 2015, having cracked the 10 billion Euro mark in 2022, they see it at 35 billion Euros by 2028 with moderate growth, and even up to 50 billion Euros in a “dynamic scenario.”

In a study, Morgan Stanley Research and the consulting firm Oliver Wyman estimated the volume of investments in private capital markets worldwide (AUM) will exceed US$7 trillion in 2020. They expect this figure to incrase to over US$13 trillion by 2025. Berlin-based fintech Moonfare, which offers investors investments in private equity or venture capital funds at lower amounts than usual, conducted a survey among family offices last year. The survey found that investments in the private capital market are playing an increasingly important role in the portfolios of this group of investors: 58 percent had allocated more money to these assets in the past two years than before.

Individual Investors on the Rise

According to Morgan Stanley Research and Oliver Wyman, 90 percent of investments in the private capital markets are made by institutional investors and ultra-high net worth individuals (UHNWIs) with investable assets of at least US$30 million.

However, due to the higher returns that investments in these long-term, illiquid products promise, an increasing number of broader groups of buyers are becoming interested in the private capital market. In addition, the number of investors worldwide who are moving up the ranks of the rich or ultra-rich is also increasing. Therefore, demand is driving the growth in the private capital market, which generally leads to an increase in the supply of products.

Closed-end funds, often compromising private equity investments or infrastructure and real estate projects, are key investment vehicles in private capital markets. However, both the conception and the marketing of these funds have traditionally required significant efforts and costs. In recent years, however, digital platforms have emerged that simplify both investor outreach and investing itself on multiple levels. Thanks to such technology, even smaller transactions can be worthwhile for providers, intermediaries, and investors. Therefore, the term “democratization” or “retailization” of the capital markets is often used to describe this trend.


Platforms and Services as Partners for Asset Managers and Financial Advisors

Such platforms do not necessarily have to appear as their own brand, they can also support financial intermediaries and wealth as well as asset managers in the middle or back office with the offer and sale of capital market products and/or the execution and settlement of the transaction, an approach we follow at portagon.

Morgan Stanley Research and Oliver Wyman point out that the perspective of wealth and asset managers on these platforms has changed: after initially being seen as competition because they addressed retail clients directly, they are now appreciated as support. Good platforms can seamlessly integrate into the systems of both product providers and advisors and offer the necessary information and tools for advising clients from a single source. This provides “a huge opportunity” for wealth managers, according to experts at Morgan Stanley and Oliver Wyman: new distribution channels through platforms, new products, more tolerant regulation and the possibilities of blockchain technology lead to the development of larger customer groups and could be “a source of competitive differentiation, protection from the strong downward pressure on fees and a way to increase customer loyalty, as well as a source of recurring revenue.”