Last year’s figures paint a grim picture for the private market. According to Bain & Company’s 2024 “Global Private Equity Report”, the value of buyout funds fell by 60%, and from 2021 to 2023, exit values dropped by 66%. With so many negative cash flows, players now sit on their capital rather than allocate it to a fund manager. Dealmaking and fundraising, it seems, have gone into hibernation with secondary strategies and buyout representing exceptions to the trend.
According to , there are around four trillion dollars of “dry powder” in the global market, which is committed but unallocated capital. Roughly 30% belongs to institutional investors and has been on the books for more than four years. In 2024, there will be even greater pressure to exit. It goes without saying that fund managers need to look for new capital.
Dealmaking and fundraising, it seems, have gone into hibernation with secondary strategies and buyout representing exceptions to the trend.
Enter the family office
Family office implementations and professionalisation are on the rise, especially in Luxembourg. We’re also seeing the impact of the generational wealth transfer, with newer investors turning somewhat away from traditional portfolios and looking at fresh opportunities in alternatives. This complements investment management, but disrupts how family offices are integrating the alternative portfolio composition alongside the more traditional liquid portfolios. Pivoting toward the private market is not a walk in the park, however. Managing these new portfolios requires a vastly higher degree of sophistication and modification in the type of investment holding structures used, especially when considering other family offices participate as co-investors.
Engaging with private markets requires far more independence in terms of how the portfolio is run, because you are less dependent on what banks and other financial organisations feed to you.
One of these new requisites is more advanced technical proficiency and data management, which differ from those in traditional asset classes. Another must-have is robust governance, which is vital when you manage more sophisticated asset classes. Aligning and upgrading reporting standards is also imperative. You must keep in mind that KPIs will differ from standard asset classes, and processing will be different both in terms of frequency and methodology. Lastly, shifting toward the private market means seeking new personnel, often with an institutional background.
A family office that goes into the private market needs to examine processes at the governance level and comprehensively review how the office operates.
The retail investor, ELTIFs, and overlooked challenges
An often-untapped source of capital in the private market is retail investors, many of whom are eager to get access. According to , only 5% of retail investors currently have money in the private market, although they account for 50% of global wealth. European Long-Term Investment Funds, commonly called ELTIFs, are helping change that.
True to predictions, ELTIFs are climbing in popularity. Bain & Company’s report found that they accounted for €11 billion in assets in 2022, a figure which grew to €50 billion in 2023 and is forecasted to reach nearly €100 billion in 2025. This coincides with a study by stating that 88% of their investor base is willing to allocate new capital to the alternative market.
Despite the growing popularity of ELTIFs, significant challenges have been overlooked, challenges that will linger with us for the foreseeable future.
Education
ELTIFs require a steep learning curve, both on the investor and fund manager side. Investors need to be made aware that ELTIFS are not mutual funds and that, as the name indicates, they are long-term funds that provide much less in the way of liquidity than retail investors might normally expect.
Similarly, fund managers need to be educated to deal with non-institutional investors, some of whom may have little experience and may not understand the nuances of an ELTIF. Sponsors will need new teams capable of mass-marketing, customer services and the ability to communicate with this new client base. Diligence and screening will be key to ensure the right message is conveyed to their private wealth teams. The distributors will also play a much more active role with an ELTIF than a typical closed-ended alternative fund.
ELTIFs require a steep learning curve, both on the investor and fund manager side.
Transparency and cost
Because ELTIFs will involve retail investors, fund managers will face greater scrutiny from the Commission de Surveillance du Secteur Financier (CSSF) and other regulatory bodies. Whereas institutional investors are unlikely to lodge complaints regarding the management of a fund, retail investors, who may feel they were misled, could be more inclined to do so. Fund managers need to take much greater care in ensuring transparency about performance and fees, which can be greater than in a closed-ended fund due to higher operating costs as well as management and distribution fees.
This will trigger further technology enhancement in the industry as the fund administrators and the transfer agency servicer will need to show they are equipped to handle a mutual fund, like on the liability side with increased regulatory compliance, and the alternative exposure on the asset side. Those who succeed will manage to offer high transparency and a sustainable cost.
Liquidity
Although some ELTIFs – an infrastructure project or debt fund, for instance – will be able to return cash on a regular basis, retail investors will need to understand that ELTIFs are intended to be investments of four or five years. Of course, not all ELTIFs will be the same, and some sponsors will allow for sizable liquidity. The new ELTIF allows for up to 45% cash or cash-equivalent listed bonds, although most sponsors will opt for much less liquidity as such a hefty pocket would go against the idea of a long-term investment vehicle. The key will be to find the right balance between allowing for a path to liquidity and the higher performance the market would expect by having such an exposure to private markets.