Live virtual briefing co-hosted with the HKVCA

by Gaurav Nayak, Sales Director, PE, Datasite

In 2025, the global private equity market is set to more than double in size, with individual investors expected to increase their capital commitments to private equity funds at a compound annual growth rate of 18.8% to nearly US$1.2 trillion, according to a study co-authored by Boston Consulting Group and iCapital.

Considering the current investment environment in the private equity space, Datasite co-hosted a webinar with the Hong Kong Venture Capital and Private Equity Association (HKVCA) featuring a panel of experts from the PE domain who looked deeper into this trend. Datasite’s Gaurav Nayak moderated the discussion with:

• Myron Zhu, Head of Private Markets, Asia, Manulife
• Seung-Ki Jeong, Manager, DGB Life
• Pamela Fung, Morgan Stanley Alternative Investment Partners

PE firms chasing after private wealth

Private markets historically catered to a fairly narrow audience of customers but now, everyday investors are being lured in by the potential for big returns. Besides, private equity is attracting a new wave of investors -- billionaire family offices and high-net-worth retail money -- the trend of private capital flowing into private equity looks to be outpacing institutional investment support for PE funds. They are now marketing enthusiastically to their private-wealth clients.

A recent UBS survey, polled 221 biggest family offices that on average managed $1.2 billion of assets each. As of last year, these billionaire offices were already allocating 21% of their money into PE, either via direct investments or through funds.

To bring in new investor groups, GPs have been and need to continue to delivering product innovation and creating processes that allow their funds and strategies to be more easily delivered into the wealth management space. The move of PE firms to private wealth has happened gradually as some of the barriers preventing investment have been eased with innovative structures that allow lower minimums, no drawdowns, simplified tax reporting, and regular liquidity windows.

Private markets historically catered to a fairly narrow audience of customers but now, everyday investors are being lured in by the potential for big returns.

New platforms and duties of the gatekeepers

Traditional private equity has always been tailored and structured for the institutional investors with a small portion reserved for UHNWI sourced through private banks. The needs of institutional investors and retail investors & high net-worth individuals are drastically different, so for the industry to tap more into high net-worth individuals and eventually retail or retirement programs, customized solutions will have to be offered to these investors.

The panelists were unanimous in their view that the fund gatekeepers are going to play a critical role in identifying and highlighting all the risks to avoid potential mis-selling. There are a lot of new platforms emerging that can really customize the exposure an individual LP can attain.

These platforms could be different distribution channels by themselves, most likely a feeder vehicle that has its own liquidity features, its own redemption features, drawdown, or capital core features, which are not typically used in institutional investing.

Such convenience offered on these platforms may result in slightly lower returns because the capital may not be always efficiently used and there may also be some cash drag or some balance drag from public market exposure to meet the redemption needs of the individual investor. Nevertheless, the products will be either in an evergreen or open-ended fund structure compared to the traditional close-ended ones.

Going ahead, there will always be pockets of inefficiency and there will be always funds and investment opportunities that can capture that inefficiency and perform.

The needs of institutional investors and retail investors & high net-worth individuals are drastically different, so for the industry to tap more into high net-worth individuals and eventually retail or retirement programs, customized solutions will have to be offered to these investors.

Fiduciary challenges to protect individual investor rights

The challenge with any private equity fund is representing accurately a large group of investors who have varied expectations and are investing with their own respective objectives in mind. It is important to find out what are the common objectives of these investors and be able to represent them accurately. 

Private equity is a complicated asset class to understand and an investor new to the asset class must realize that investment is not just about committing to say the latest popular VC fund but understanding the benefits and drawbacks of the asset class. In reality, there's a lot of work that goes on behind the scenes at your conventional PE firm.

Our panelists concurred there is a need to protect an investor looking into put in hundred thousand dollars in a fund versus the large public pension that's investing hundreds of millions. There is a fiduciary duty that GPs need to bear in mind anytime they are making a commitment on behalf of an investor and asking the questions: How to best represent their interests? Is this investment opportunity suitable for them?

The first step is having somebody who really understands the needs of the investor, what they are trying to achieve, and how they can tailor their products to cater to these different classes of investors. The next step for the industry as a whole, is to think about the rights of these individual investors and how can they be protected, while allowing them to have exposure to the higher returns that private equity can bring.

True democratization of private equity will need guardrails and protections for individual investors.

Can technology help structure the emerging private equity markets?

Innovations in technology can facilitate the ability of individual investors to access private equity as well as enhance  private equity to be a more accessible and transparent  asset class as opposed to the opaque asset class that it has historically been, especially with the recent rumblings from the SEC

The transformation within public markets over recent years from unstructured data to structured data looks to be repeated within the private equity space. The application of blockchain technology could help facilitate these markets and make them a lot more efficient. Understanding where blockchain technology could work to enhance and further streamline the processes that are currently in place would be the next question that market participants would need to answer. The inherent challenge is that private markets in general do not offer a standardized product.

The question an individual investor is asking is, “How do I build my net worth?” True democratization of private equity will need guardrails and protections for individual investors. Everybody has the same need to take care of their families, provide for their loved ones, and so on.

Technological innovation has brought down the barriers for investing for a lot of people. The industry has to retain that fiduciary responsibility to their LP’s whoever they may be, given they are the ones putting money to invest for the future.