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Two private-equitySPKKRKKRETFETFHPSNAVETF ETFETFYour browser does not support the element. bros walk into a Nobu. One thinks ordinary people investing in private markets is a swell idea. Stockmarkets are so concentrated that buying the & 500 index is just a bet on a handful of giant technology firms, he says. Everyone needs diversification. Private credit is here to stay and the bond market isn’t even that liquid. That corners of finance previously open only to institutions and the very rich are now accessible to more individuals is a good thing. Imagine the fees.His buddy, however, thinks it’s a terrible idea. The illiquidity of assets in private markets makes them inherently unsuitable for individual investors, he mutters. Working people are already exposed enough to the industry’s talents through institutional investors and, increasingly, life-insurance policies. Shedding the institutional veil in between could be dangerous for them and a bit degrading for buy-out barons. Besides, scepticism is the only appropriate response when a plutocrat says he wants to “democratise” something.There is some truth to both arguments, but it is quite clear who’s getting promoted. Firms such as Apollo, Blackstone and have spent the past decade expanding away from from their roots as leveraged-buy-out shops into new corners of finance, particularly lending markets once dominated by banks. The question today is whose money they invest. “Most of their large, traditional clients already have significant allocations to alternatives, and not a lot of room to make that higher. It’s obvious that they would start to look for new pools of capital,” says Patrick Davitt of Autonomous, a research firm. One of those pools is life-insurance liabilities. Another, perhaps even more radical move involves bringing private markets directly to individuals.The result is an explosion of financial innovation. In January Blackstone, more than a fifth of whose assets are managed for “private wealth” clients, launched a private-equity vehicle for individual investors to complement its giant ones in private credit and property. In May partnered with Capital Group, a public-markets manager, and the firms plan to launch credit vehicles for individuals. In September Apollo and State Street, known for its index funds, detailed plans to launch an exchange-traded fund () that will invest in private credit.BlackRock, a giant provider of s, is also pushing hard into private markets. This year it bought Preqin, a private-markets data firm, and Global Infrastructure Partners, which does what it says on the tin. It is also said to be going after , a big private-credit shop. An increase in capital raised from individuals is likely to be best for the large, recognisable firms. But it also means more competition between institutions once separated by the boundary between public and private markets, as this increasingly blurs.Fees, leverage and exclusivity vary greatly between products. One fundamental challenge, though, is working out how much illiquidity individual investors will stomach. Given their reliance on patient institutional investors, managing liquidity transformation—the alchemy that turns short-term deposits into long-term loans in the banking system—has hitherto been a less important part of the private-markets business model.“Semi-liquid” vehicles have so far been the most popular answer among managers. Like mutual funds they allow investors to redeem their shares at their net asset value () at predetermined intervals. When markets are spooked and redemption demands soar, as they did in Blackstone’s property fund starting in 2022, withdrawals are limited to a pre-established level, often 5% of assets per quarter. Finian O’Shea of Wells Fargo, a bank, reckons interval funds—another semi-liquid structure that can reach broader swathes of the retail market—are the industry’s “next frontier”.More radical options could involve giving investors greater liquidity. There are plenty of tradeable private-credit vehicles, but packaging such loans into an , as State Street and Apollo plan to do, is truly novel.s are often easier to trade than the securities they track, but market-makers keep spreads tight by creating and redeeming units, often by accessing the underlying market. Exactly how the market for Apollo’s loans would function, and how illiquid they really are, particularly in a time of stress, are key questions for regulators. For investors looking to invest their savings, this could turn out to be an innovation too far.
