The surge in demand for private market investments and their subsequent adoption among individual investors has spurred countless headlines touting the ‘democratisation of private markets’. Now, with the continued rise of ‘semi-liquid’ evergreen funds, the conversation is shifting from how individuals can access private markets to what this means from an investment perspective.
The significance of the opportunity may come as a surprise to some, with private companies representing more than 90% of the investable universe, according to data from Capital IQ. This translates to the potential for higher returns relative to public markets, as well as enhanced diversification that may reduce overall portfolio risk and provide stability with the potential for lower volatility compared with public markets
This is particularly important now as public markets are shrinking, with many of the most innovative and high-growth potential companies staying private for longer or even indefinitely. At the same time, public market valuations appear to be increasingly driven by factors other than intrinsic value – such as memes, media and momentum – whereas private market valuations seem more closely aligned with fundamental performance metrics.
Over the past 30 years, these and other factors have driven a surge in demand for private market assets from institutional investors. Yet liquidity constraints, high minimum investment thresholds and a complex onboarding process have historically precluded individual investors from tapping into the same opportunities.
“The leading evergreen funds now offer individual investors the opportunity to invest in the same deals, at the same price, at the same time alongside institutional investors.
Private wealth investors no longer pay substantially more for substantially less – a problem that plagued earlier generations of ‘retail’ products.”
European private wealth investors have had the option to allocate to a broad spectrum of private market assets via listed investment trusts. This sector, however, often suffers from deep discounts to fair value, with stocks trading at less than the prices the assets could command in a secondary sale or less than the trust’s liquidation value. To put it another way, while you can sell your listed investment trust shares every day, you may not like the price.
The introduction of semi-liquid evergreen funds has shifted the way individual investors can access private markets over the past five years, providing investors with prompt exposure to the underlying investment strategy compared with traditional private equity offerings. With no capital calls and scheduled distributions of income, the capital is regularly recycled, allowing them to invest designated amounts immediately.
Equally important, evergreen funds allow investors to compound their gains by keeping capital invested. Liquidity is typically offered on a quarterly basis, usually for 5% of the fund, not of an individual investor’s position – an important distinction.
Streamlined investing process
The latest generation of evergreen private market funds has further streamlined the investing process with simple electronic subscription agreements, seeking – as much as possible – to replicate the simplicity with which public market assets are purchased. In many cases, all forms of paperwork have been eliminated through ‘buy with a click’ structures that use the mutual fund trading system in the US.
Transparency has also improved, with the value of an investment often published daily or weekly. Finally, this operational efficiency has facilitated lowering the minimum required investment to £25,000 or less – dramatically expanding the breadth of investors who can take advantage of the opportunity.
Fee reductions are another critical development. Private wealth investors no longer pay substantially more for substantially less – a problem that plagued earlier generations of ‘retail’ products. The fees for evergreen funds have come down closer to fees paid by institutions in the same strategy, according to the iCapital paper The Future is Evergreen: The Next Generation of Private Market Funds.
For years, individual investors have faced historic barriers to entry, limiting them to around 10% of the world’s companies.”
But the most important development lies in the allocation of investments. What we are seeing is the leading evergreen funds now offer individual investors the opportunity to invest in the same deals, at the same price, at the same time alongside institutional investors.
This equivalence is supported by pro-rata allocation policies, which mitigate the risk of adverse selection and ensure that private wealth clients are treated similarly to the largest pension fund or endowment. This best practice means evergreen funds are treated as another client of the platform, investing alongside institutions across the globe.
For years, individual investors have faced historic barriers to entry, limiting them to around 10% of the world’s companies. As private markets have matured, they have facilitated the ability for companies to stay private for longer, particularly those tied to technological advancement and other major trends shaping the future global economy. This has further fuelled the debate around democratising private markets.
But while semi-liquid evergreen funds have brought down historic barriers to entry for individual investors, it was never just about access. It was about offering individuals the opportunity to access investments in similar deals as institutional investors, at the same price, at the same time. This marks a new phase in the evolution of private markets – one where individuals are no longer on the sidelines but are active participants in shaping the future of the global investment industry.
Bob Long is CEO at StepStone Private Wealth
