“Democratization” of Private Investments for Europe’s Retail Fund Investors

May 18, 2020 — London

The number of products targeting high-net-worth and affluent clients is growing

The retail clients of Europe’s fund market will, in time, account for a larger share of fundraising for private investments, according to the latest The Cerulli Edge―Europe Edition.

The number of private investment products targeting the region’s high-net-worth and affluent clients is increasing. Supply is currently ahead of demand and most products have relatively low assets under management. However, Cerulli Associates believes that as retail investors become more sophisticated, the introduction of private investments into their portfolios will become increasingly viable and arguably necessary to meet long-term goals.

The democratization of private investments is a route to enhanced returns and diversified portfolios. However, questions remain as to the suitability of illiquid products in retail portfolios.

“Substantial demand is yet to materialize in Europe and market volatility caused by the coronavirus pandemic will test fund structures,” says Andrius Dovydavicius, an analyst on Cerulli’s European institutional team.

He says that managers should be prepared to field a higher number of enquiries from intermediaries, because their clients are more susceptible to panic than institutional investors during volatile markets. “However, the lack of liquidity, if appropriately advised to clients, can help shelter retail clients from impulsive decisions and boost the odds of meeting long-term goals.”

The European retail market remains heterogenous in terms of opportunities to access private investments for high-net-worth and affluent clients. Investors’ levels of sophistication also vary.

The European long-term investment fund (ELTIF) structure, launched in 2015, has provided a regulated closed-end structure suitable for selling private investments to retail clients, while benefiting from a European marketing passport for both retail and professional investors, provided that certain conditions are met. Currently, Southern Europe and Switzerland provide the greatest opportunity for raising assets for ELTIF products, but managers are encouraged to partner with prominent intermediaries to improve fundraising prospects.

Fund launches have remained muted, with approximately 10 funds in the market. Although ELTIFs impose restrictions that can limit their appeal to managers and intermediaries, Cerulli expects the regulated structure to gain traction. “This expectation is supported by an increase in fund launches of late. However, recent volatility may delay product development initiatives,” says Dovydavicius.

Of the European private banks surveyed by Cerulli, 38% plan to increase their strategic allocation to private debt over the next 12 months and 45% expect to increase their strategic allocation to private equity. Half of the respondents do not have an allocation to infrastructure, but nearly one-quarter (23%) expect to increase their recommended strategic allocations to the asset class. Within private equity, buyouts, growth, and turnaround strategies are expected to be focal points for European private banks over the next 12 months. Limited partnerships, fund of funds, and master feeder funds will be the vehicles most used for accessing private equity, with fund of funds being used more for advisory engagements.

The typically high minimum investments, the lack of transparency, and the illiquid nature of private investments may deter a higher allocation, but several products have been launched targeting investors with smaller investment requirements and higher liquidity.

The appropriate structure and fund attributes will depend on the target market. Liquidity concerns can be enhanced by including secondaries or more liquid securities within a fund, but the latter can potentially create drag on performance. This will have to be assessed in lockstep with fee levels. In addition, education remains a key challenge, with retail clients more open to strategies that more closely resemble their existing investments. The picture remains nuanced, but the opportunity for managers is growing.

Other Findings:

  • The debut annual value assessments being conducted by asset managers in the UK have generated mixed results. Hopes that firms will rise to the levels set by the standard-bearers may be frustrated as markets tumble and fund houses shy away from performance reporting. However, as distributors, consultants, and commentators analyze the value assessments, the culture shift that the regulator seek may yet become evident.
  • 2019 was an excellent year for UCITS and AIF structures. By the close of 2019, total assets of UCITS and AIF products had grown 17% year-on-year to reach €17.7 trillion (US$19.9 trillion). There is a real risk, however, that the fallout from the coronavirus pandemic and regulatory uncertainty will put a brake on growth.

Note to editors

These findings and more are from The Cerulli Edge―Europe Edition, 2Q 2020 Issue.

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