Asset managers are looking for new ways to expand their European investor market share amid challenging fundraising conditions. A growing chorus of firms is attempting to repackage alternative investment products—including private market strategies—into fund structures that are suitable for retail audiences. Others are turning to third-party marketing companies (TPMs) to help raise assets.
Retail investors are underweight private market strategies, but this is slowly changing
Retail investors have limited exposure to private market strategies. Take private equity, for instance. Right now, it is estimated that only 2% to 3% of retail client assets are invested in private equity.1 Retail investment into private equity has been hindered by several factors: the strategy's high minimum investment thresholds, multi-year lock-ins and regulation that requires retail investors to be given ample fund liquidity.2
However, attitudes are starting to change. An EY study revealed that 73% of asset managers believed that non-accredited investors should be permitted to invest into private market strategies as it would bring about diversification benefits.3
The emergence of new private fund products is encouraging retail investment into illiquid assets
“We are starting to see greater retailization in terms of where private asset funds are being distributed, and this is a trend we expect will persist over the coming years," said Jeremy Albrecht, Head of Client Coverage for Continental Europe, UK & Ireland at RBC Investor & Treasury Services and the shift is being partly driven by the emergence of new fund products, which encourage retail investment into illiquid assets.
ELTIFs had a poor start, but the potential is there for retail investment into illiquids
Albrecht said the European Long-term Investment Fund (ELTIF) is perhaps the most well-known of the illiquid investment products currently being sold to retail investors. But what is an ELTIF?
Introduced by EU regulators in 2015, the ELTIF is a closed-end fund structure where client capital can be locked in for up to 10 years,4 and whose funds can be used to invest in long-term assets, including non-listed companies, infrastructure projects and debt instruments inside Europe.
However, ELTIFs have not enjoyed much capital-raising success. According to EU data, only 67 ELTIFs have been authorized over the last seven years across four member states, accumulating just €2.4 billion in assets.5
“The advantages of ELTIFs are diminished by the restrictive fund rules and barriers to entry for retail investors, the combined effect of which reduces the utility, effectiveness and attractiveness of the ELTIF legal framework for managers and investors. These restrictions are the key drivers of the ELTIFs' failure to scale up significantly and reach their full potential to channel investments to the real economy," noted the European Economic and Social Committee in a review examining ELTIFs.6
It is likely that many of the ELTIF restrictions will be removed
Despite this weak start, there is reason to be optimistic about ELTIFs' long-term prospects, continued Albrecht. “The ELTIF regulations are currently under review by the EU as part of the Capital Markets Union (CMU), and we expect a number of positive changes to be implemented. It is likely that many of the restrictions which have impeded ELTIFs will be removed, based on the draft proposals we've seen.”
The draft amendments indicate that ELTIFs will no longer need to invest in purely European projects, giving managers more flexibility.7 The proposals will also eliminate some of the barriers, which have precluded retail investors from buying into ELTIFs. For example, the proposals scrap the €10,000 minimum investment threshold—together with the 10% aggregate threshold for retail investors whose portfolios are below €500,000.8
TPMs could play an important role in helping managers target investors
At a time of rising costs and mounting inflationary pressures, asset managers looking to expand distribution of their funds—including ELTIFs—are trying to do so in a way that is as efficient and seamless as possible.
Nils Mordt, Head of Client Coverage for the UK at RBC Investor & Treasury Services, pointed out that managers have access to the services of TPMs to assist with their capital-raising efforts inside Europe.
TPMs can help managers to access markets where they do not have a presence
“Leveraging TPMs can help managers to access markets where they traditionally do not have a presence or experience. Similarly, TPMs can give managers access to new investor bases. This is an area where TPMs can really help asset managers," said Mordt.
Fundraising in Europe has been difficult for managers, owing to a number of headwinds. By embracing new fund structures—including ELTIFs—and collaborating with best-in-class TPMs, asset managers are in a position to increase their chances of success when distributing funds in Europe.