- Many wealthy investors want to increase their holdings of private alternative assets, with between $8 trillion and $12 trillion in household funds available for such assets. Private equity firms and asset and wealth managers are eager to expand their business with individuals.
- For this market to thrive, the current model must evolve into a robust digital system that can efficiently support individual investors at scale.
- Five business archetypes are emerging to overcome the current barriers of high administrative costs, illiquidity, a difficult collateral process for lending, and high minimum investment size.
- The largest wealth and asset managers will likely catalyze developments and can seize a first-mover advantage. Other firms can thrive as challengers or fast followers.
Soon after the financial panic of 1792, 24 stockbrokers and merchants gathered on Wall Street in New York to sign a two-sentence document (in dubious lore, they were shaded by a buttonwood tree). The rules and boundaries they agreed on aimed to reestablish trust in the marketplace and marked the origin of the New York Stock Exchange.
Similar to the Buttonwood Agreement, most financial market milestones have hinged on a solid payment structure and an ecosystem of participants, customers, and regulators. The same economic logic applies in the quest to build a robust, digital infrastructure that will replace today’s bespoke model for private alternative assets. A new system is necessary to meet the large, growing demand for such assets among individuals, and also stands to benefit private equity firms, wealth managers, other providers, and large institutional investors.
Private assets under management are highly concentrated in pension funds and other institutions that invest through private equity partnerships. But while individuals account for just 16% of such assets globally, they hold roughly 50% of global wealth. About 38% of high-net-worth individuals and 53% of very-high-net-worth individuals would like to increase their allocation of private alternative assets (see Figures 1 and 2). They’re looking for greater diversification, and some have noticed family offices allocating a greater share of portfolios to private assets.
Global investors holding $70 trillion in wealth are the biggest underserved candidates for private alternative assets
Many individual investors globally want to increase their allocation in private alternative assets
What needs to change
Unlike in public markets, private markets have only limited electronic infrastructure or standards to support transactions, collateralization, administration, registry, and reporting at any scale. Private markets also generally lack transparency on performance, cost, and underlying investments. The current system was designed for large institutional investments with bespoke and manual processes, which, despite their inefficiency, have not created significant problems. However, the lack of a digital, streamlined industrial model makes broad distribution to individuals almost impossible. Building a new industrial model is the answer, but it will entail changes along the industry’s value chain (see Figure 3).
Delivering private alternative investments at scale requires new infrastructure and workflows
Developing new distribution methods for these assets will also require firms to overcome other barriers as well. To start, private assets are illiquid and have unpredictable cash flows. In addition, managers offering private fund investments struggle to efficiently offer credit using those investments as collateral because they lack established processes and workflows. Moreover, many financial advisors don’t have deep knowledge of private investments, so they don’t offer these assets to clients. Advisers thus will need education and compliance oversight to become comfortable with the attendant risk.
For Digital Assets, Private Markets Offer the Greatest Opportunities
Four emerging business models hold promise by tapping the benefits of distributed ledger technology.
Five emerging archetypes
Several models have emerged to address these barriers. Each has different features and operational and strategic implications for the companies involved.
“Walled-garden” intermediated feeder funds. Some wealth managers can distribute private assets by enrolling existing clients in feeder funds. While this closed architecture limits the scalability of the model, it’s relatively straightforward for large wealth managers with broad capabilities, including Fidelity, Goldman Sachs, UBS, and Morgan Stanley. This model can also provide an early edge that will be hard for smaller firms to replicate. Keeping the business in-house could be easier than coordinating with third parties. And the model gives large firms control in the absence of a market infrastructure. We estimate that firms using this model currently manage more than $300 billion of assets.
Direct-to-consumer feeder funds. Feeder funds on digital platforms, which can be tokenized, sell directly to investors. Securitize, for instance, helps asset managers such as KKR and Hamilton Lane bring private assets onto a blockchain via its end-to-end tokenization platform and regulated secondary exchange. Access to customers could be tricky for this model. Most high-net-worth client assets are held by wealth managers, making it difficult for direct-to-consumer funds to dislodge those assets and scale up. And existing wealth management channels offer services that many investors value, such as advice, portfolio management, credit, and reporting.
Platform partnerships. Platform partners work with wealth managers to develop a curated set of private investment options that wealth managers can sell to their clients. iCapital, for instance, is a financial technology company with a platform that provides alternative investment solutions to investment professionals. An early entrant, it has rapidly scaled up a two-sided market of general partners and potential limited partner investors. iCapital’s market making, along with a sophisticated online portal and technology, has attracted wealth managers seeking to provide access to private assets.
Emerging market infrastructure. Regulated trading venues have emerged to facilitate transactions and liquidity of private alternative asset funds, or similar vehicles such as feeder funds. ADDX is one company providing a regulated platform for the offering, settlement, custody, and secondary trading of digital securities. By operating an integrated suite compliant with regional securities laws, ADDX has built an institutional-grade platform attractive to large funds. And its user-friendly portal has attracted investors.
Industry-level market infrastructure and standards. In this open architecture model, separate parties provide trading, settlement/clearing, and transfer/registry for private assets, akin to public market infrastructure. For instance, private companies and their shareholders can list their shares on Nasdaq Private Market’s exchange for institutional investors and family offices to purchase. The exchange provides distribution of shares, and infrastructure for trading, clearing, and settling accounts.
https://www.bain.com/insights/private-asset-investing-desperately-needs-new-market-infrastructure/?utm_medium=social_advocacy&utm_source=LinkedIn-dysi&utm_content=8a2adbf6-4fe2-474f-8ed7-7fc4dd6470a0&utm_term=14906
