PLACE FINANCIÈRE & MARCHÉS — Private Equity

CARTE BLANCHE

Repowering the people “retailisation” of private funds


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High returns have gone to private equity funds over the recent years. The public has been cut from any participation to it so far. Fund managers are doing their best to enable a broader public investor base – but regulators should also be promoting such participation.

Private funds, which invest in assets that are unlisted, such as new technology, infrastructure or real estate, have deeply modified our financial system over the past two decades and have accelerated the trends that are transforming our daily lives. They have fostered the quick digitalisation of our society, and are playing a crucial role in the current race to decarbonise our world and reconstruct our post-COVID economy. As intermediaries, private funds are more agile than some established institutions in view of their more efficient decision-making; and in a world of uncertainty, their capacity to manage risk has been more fruitful than the risk-adverse approach of some large institutions. As a result, private funds now occupy a space that is almost as important as credit institutions within the investment world. The public, however, have thus far been left behind.

Private funds, which invest in assets that are unlisted, such as new technology, infrastructure or real estate, have deeply modified our financial system over the past two decades.
Thibaut   Partsch

Thibaut Partsch,  Partner,  Elvinger Hoss Prussen

Access to private funds has until now been complicated for the public. At their inception, smaller private fund managers were not equipped to handle large crowds of investors in the way listed companies or mutual funds can, and institutional money was more easily accessible to them. In Europe, the alternative investment funds’ European passport has been limited to professional investors, of which the definition is so strict that sophisticated private well-informed investors, who have the capability to understand such alternative products, are excluded from the opportunity to invest in them. This has resulted in most European countries cutting the relationships that private funds had developed with private well-informed investors. Rightly or wrongly, the regulation on key information documents for packaged retail and insurance-based investment products, which has been applied to investment in alternative funds, has further scared away private funds from raising capital from the general public.

The public should have better access to the returns generated by private funds. While in the past, the public could benefit from investing directly into new ventures through initial public offerings, the number of such offerings has declined, as has the median return generated on the occasion of such initial public offerings. It seems that these returns are instead now shared between those who have access to private funds. The public should have the chance to participate in these growth opportunities rather than suffering from null or negative interest rates.

A wider participation of the public in private funds would also be conducive to more transparency. An ever-increasing number of stakeholders realise that a market in which a huge fraction of companies remain private may not serve the interests of investors and society, as it generally reduces transparency towards society at large. Fostering investments by the public in private funds would allow for better transparency, and could also broaden the impact of the recent European Union initiatives with respect to sustainability-related disclosures in the financial services industry.

Fostering investments by the public in private funds would allow for better transparency, and could also broaden the impact of the recent European Union initiatives.
Thibaut   Partsch

Thibaut Partsch,  Partner,  Elvinger Hoss Prussen

Private funds nowadays have shown an increased willingness to raise capital from the public. They now have reached a size and level of organisation that allows them to properly manage investor relations with a wide group of investors beyond their traditional institutional base. Several managers in the United States have done so with open-ended structures, and in the European Union, some market participants rely on the European long-term investment fund regulation to make direct contact with private investors. Intermediaries are also building up their capabilities to bridge access to private funds’ offerings to the public.

There will be challenges on the road to allowing the public to fund and fully participate in private funds. Supervisory authorities will ultimately have a big role to play, to best balance the interests of fostering innovation and decarbonisation, helping economic growth, and ensuring that the public is properly informed. It must be ensured that members of the public fully acknowledge the specific risks of investing in alternative assets before they participate. In the end, this is the investment in the real economy and in our future.