Securities and Exchange Commission Chairman Paul Atkins asked his agency this month to review decades-old rules that restrict who can invest in private markets. The request underscores how the wealth management industry is in the midst of a transformation that is resulting in private investments and alternatives becoming more accessible to everyday retail investors across the U.S.
Wall Street positions investments in alternatives and private markets as an opportunity: Retail investors, firms say, should have the ability to access the potentially higher returns that private credit, private equity, real estate, and venture capital can yield relative to public equities and other more mainstream asset classes. The financial firms, of course, get potentially trillions more dollars to manage and all the fees that entails.
But these new vehicles raise a number of questions, says Martin Gross, founder and president of Sandalwood Securities. The biggest being: How can investors tell if the new offerings are high-enough quality, especially when private markets don’t have easily accessible valuations or data transparency like public markets do?
“The more portfolio tools, the better, but once you’re inside that door, you’ve got to make sure that what you’re being offered makes sense,” says Gross. “You have to understand what a good fund is from a bad fund.”
There’s a learning curve. While retirement savers might have a handle on the public companies they are currently invested in, adding privates and other alts adds complexity. Privates are generally classified as illiquid assets, meaning investors cannot quickly or easily sell their holdings, and many funds require investors to commit their dollars for five to 10 years or longer. As with all investing, there is no guarantee of high returns, and fees tend to be higher. And if something goes wrong, it isn’t as easy to exit as a public investment.
“Even seasoned institutional investors struggle to get the clear valuations, data, and visibility they need to make smart decisions,” says Simon Tang, U.S. director at private markets AI firm, Accelex. “For retail investors adding to their retirement pots, this lack of clarity could mean taking on risks without having a full picture of the investment.”
That said, private markets do offer opportunities. In a time when just a handful of companies dominate public index funds and the number of public companies overall is shrinking, privates can give more diversification to portfolios, which helps in times of volatility. And given that many retirement savers have, in theory, long investment time horizons, privates can make sense.
Different assets work for different time frames, says Gross. Private equity and venture capital are better for those with more time, while real estate can work shorter term. “It’s just a case by case analysis,” he says.
As Morningstar notes in its analysis of the growing public-private partnerships, whether these strategies will work out for retail investors remains to be seen. “Despite the brand-name pedigree of the asset managers involved, most of these strategies are untested,” Morningstar’s Jason Kephart and Bridget B. Hughes write. “What is known is that private assets bring added complexity, reduced liquidity, and higher fees. Investors must weigh whether the potential benefits of private-market exposure are enough to clear those hurdles.”
While 401(k) plan sponsors have been allowed to include private investments in a multi-asset fund, like a target-date, since 2020, there is more traction now because “there seems to be an expectation of less regulatory scrutiny from the SEC going forward,” Kephart said.
When it comes to the average American’s nest egg, investing experts say to tread carefully while these new investment vehicles are being established.
“If the private equity industry is set on expanding to access retail investors’ hard-earned cash, it must take strong measures to improve clarity over private assets’ valuations and performance to ensure investors can make informed decisions and have full visibility of where their retirement money is going,” says Tang.
