BMO alternatives leader unpacks how private managers are working harder to meet the needs of Main Street
There’s a massive opportunity to be unlocked from letting retail investors access the private markets – and to get there, there is a need to innovate to tear down long-standing barriers.
That’s the word from Jeffrey Shell, head of Alternatives, Commercial ESG and Innovation at BMO Global Asset Management.
“There's about US$145 trillion of buying power in institutional wallets, much of which is allocated to private markets. … If you look at the retail investors, you would end up with about another US$145 trillion, but with little private-markets penetration,” Shell (pictured above) told Wealth Professional. “This is a fact that private-market asset managers don't gloss over anymore, and why they are broadly looking to access the retail market.”
Shell was among the contributors to a new report by the World Economic Forum, which looked into the difficulties and opportunities in extending private-market investment access to retail investors. The WEF is taking an interest in broadening private market access, he says, as it could be a critical key to the challenge of financial inclusion.
“When you have a system where the very best, most resilient forms of investing are only available to the ultra-rich and to institutional investors, that can go a long way in perpetuating wealth inequality,” he says. “Part of our motivation for working on this was to see if there are better ways to safely and appropriately bring these private markets investments to a broader group of constituents.”
Retail investors traditionally locked out
What’s kept the most attractive strategies and best-performing managers out of retail investors’ reach? One barrier has been the steep minimums, which can go as high as $10 million according to Shell.
The investment format could also be an obstacle. Taking closed-end funds as an example, he says it can be challenging for retail investors to warm up to the ownership experience of committing capital to be drawn at some undetermined point in the future, as opposed to directly investing in a fund. Beyond that, he says the buying process puts off a lot of investors with plenty of legalese, complex documents, and esoteric risk disclosures.
“The fee structures on these are opaque; you don't generally understand the full freight that you paid,” Shell adds. “If you think about the different buckets for retirement planning, registered plans are a very natural place to put less liquid investments. But most of these investments aren't designed to be registered plan eligible – another sign that these products aren’t geared for the retail investor.”
Hot spots and breakthroughs
In Canada, things are changing for the better. As advisors take an increasing interest in private market investments, Shell sees more putting skin in the game, test-driving those alternative vehicles with their own capital.
“They're not quite comfortable enough to persuasively explain it to their investor clients, but they like the story,” he says. “They want to have the experience themselves in advance of, we think, being stronger advocates to their clients the next time a fund comes around.”
Shell is also seeing much better-designed private-market products, crafted to be more investor-friendly and easier for retail investors to understand what they’re investing in. That includes institutional-quality products with exposure to leading managers, evergreen or open-ended funds that are eligible for registered plans, and funds with the ability to provide liquidity as needed.
“We know that investors intend to stay in for a long time, but life happens. We’re seeing formats where you’re able to get out if needed,” he says. “In certain situations, fees are becoming easier to understand, and some formats are doing away with the concept of capital commitment … They can deploy funds immediately.”
Mapping the landscape for investor-friendly products out by asset class, private equity, private credit, and real estate funds are leading the way, with private credit having the most momentum. “We are also seeing the emergence of solutions that combine the best of all four private-markets types into a single, one-ticket offering,” Shell says.
“It’s important for investors, advisors and dealers to think about the cascading fees, the quality of the underlying managers and the fund construction,” he emphasizes. “We think the next five years are going to be very exciting across all the primary asset classes.”