A carefully curated roster of partners will be vital in ensuring the expertise and tools necessary to compete effectively.

Even as the details are being ironed out, there is little doubt that private markets are evolving before our eyes as broader access and greater liquidity create a virtuous cycle. The potential market is huge. The overall size of the retail market is on par with institutional, but most retail investors have little or no existing exposure to alternatives. The same could have been said about the institutional market until recently: Allocations to alternative assets by U.S. state pension funds rose to 19.1% in 2019 from only 5.6% in 2001.18 Even a paltry 10% of the 401(k) market would mean $670 billion of new assets.19

Managers will need to adapt if they wish to exploit this emerging paradigm. Product design is one area of opportunity, since standardization has yet to happen. The realities of retail distribution will be eye-opening for any GPs without any experience in that world. “Build it and they will come” is rarely successful. Even with pent-up demand, managers will need to justify their fees to retirement plans more accustomed to inexpensive passive strategies.20

Successfully penetrating new markets means that education, data gathering, and analytics are paramount. Familiarity helps: “One of our key strategic priorities is to expand access to the private markets to newer groups of investors,” says Drew Schardt, a Hamilton Lane managing director and Private Assets Fund investment committee member. “So we created (a) product to give the HNW, mass affluent, individual investors exposure to the asset class in a way that is unique and almost akin to how they’re used to investing in other asset classes.”21

Even asset managers choosing not to roll the dice with unproven investment vehicles will need to get accustomed to a more transparent operating environment. Investing in private markets will be less about who knows who, and more about ROI, fees, transparency, access, investor experience, and other factors that have determined success in the rest of the industry for decades. While diversifying their client base and revenue streams, managers will also need to get comfortable with fee erosion and avoid product cannibalization. Greater access, transparency, and involvement by firms such as Vanguard mean inevitable pressure on fees. This is the cost of growth.

To shield (and potentially enhance) the margins to which they have become accustomed, managers will want to proactively address operational issues. Existing operating platforms may not be up to the task. Valuation methodologies, process transparency, regulatory compliance, reporting frequency, and other tasks will all need to be revisited and revamped. It is a daunting prospect, which makes the growing ecosystem of technology vendors and service providers a welcome sight for managers wary of change.

Managers must carefully curate a roster of partners to ensure they have the expertise and tools necessary to compete effectively. Those planning to sell their expertise via different distribution channels will want to make a point of finding partners with expertise and experience in building bridges between the world of alternative investments and retail markets. No one can go it alone. The right partnerships should serve as springboards for anybody intent on succeeding in the soon-to-be transfigured world of private markets.

 

Legal Note

The Investment Manager Services division is an internal business unit of SEI Investments Company. This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.

18 Private Investments Sub-Committee Update, SEC Asset Management Advisory Committee, December 1, 2020.
19 Frequently Asked Questions About 401(k) Plan Research, Investment Company Institute, March 30, 2021.
20 Rod James, “Private Equity and DC Pensions: PE Must Prove It’s Worth the Fee,” Private Equity International, August 12, 2020.
21 Alex Lynn, Complex ’40 Act Funds Help Democratise PE, Private Equity International, March 15, 2021.
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