BMO has contributed to a new WEF report on the significant benefits of alts for investors and economies
Interest in private market investments has been growing, not just among institutional investors but by retail investors too, and the world of alternatives is moving towards mainstream.
But what are the opportunities, risks, and barriers to growing the private investments space – including private equity, private credit, infrastructure, and real estate - and what is needed to ensure the ecosystem meets the needs of individual investors?
A new report published today (Nov. 1) by the World Economic Forum includes insights from BMO as a major contributor and other stakeholders examining the part that private investments can play in building wealth and ensuring long-term financial stability for suitable retail investors.
The size of private markets has ballooned to around US$9.6 trillion in assets globally and the shift is having a significant impact on the global economy and financial returns.
Among the opportunities are:
- Enhanced returns – the outperformance of private market asset classes versus their public market counterparts on a risk-adjusted basis over the past decade
- Generating income – through distributions, dividends, and rents
- Risk diversification – diversifying portfolios beyond bonds and equities
However, there are risks including:
- Complexity – compared to public markets
- Illiquidity – with long lock-up periods
- Limited information – from private companies compared to listed entities
- Adverse selection risk – information asymmetry may favor institutional investors over individuals
- Cost – currently higher fees and minimum investment thresholds
Barriers to private market investing
There are four key barriers identified in the report: education of advisors and investors, regulation, access barriers (including costs), and suitability requirements.
The report notes that these barriers are experienced by retail investors differently depending on their wealth profile with education and access the main issues for those with smaller levels of investable assets while wealthier investors are more likely to face suitability issues.
Removing the barriers is a key element of opening up private markets to mass affluent and affluent retail investors.
Boosting both the demand-side and supply-side elements within a strong ecosystem is essential for broadening private market access in a safe way for retail investors.
What can advisors do?
The report provides several calls to action that can broaden access to private markets for suitable individual investors, using a multistakeholder approach.
For financial advisors, this requires being educated in how to assess investor liquidity and to have the confidence to recommend private assets based on clients’ return and volatility profiles.
Private market funds will need to develop communication styles that engage with retail investors, a new audience for them to speak to directly.
Meanwhile, investors themselves will need to better understand their own liquidity needs and restraints and how private assets impact their portfolios.
Tailoring products to investors’ needs, accelerating standardization through industry consortiums, simplifying the investor journey, and technological innovations are all part of the focus needed by industry stakeholders.
