Private Markets’ Next Battle Is Not Access — It’s Understanding

The investment industry has spent years working out how to bring private markets to a much broader audience. The harder challenge may be explaining what investors are actually buying.

Private markets have spent the past decade moving steadily towards the mainstream. What was once largely the preserve of institutional investors is increasingly appearing in wealth portfolios, defined contribution schemes and new investment structures designed to make less-liquid assets more accessible.

But there is a danger in focusing too heavily on access. The next challenge for private markets may not be creating more routes into the asset class. It may be making sure investors understand where those routes lead.

That is one of the more interesting messages from Invesco’s latest Defined Contribution Participant Pulse Survey. Its research among 517 participants in large US defined contribution plans found broad awareness of private markets, but also significant gaps in understanding around characteristics, fees and individual strategies. Participants identified growth potential and risk when asked about private equity, while a substantial proportion remained neutral, confused, intimidated or negative about the asset class.

That matters. The industry has become very good at solving the structural problem. New vehicles, fund formats and distribution channels are making it increasingly possible to incorporate private assets into portfolios that historically relied almost entirely on listed securities. However, a wrapper does not automatically make an investment understandable.

Private equity is not simply another version of an equity fund. Private credit is not simply a bond fund with a higher yield. Infrastructure, real estate and other private assets bring different combinations of liquidity, valuation, fees, risk and return characteristics. For institutional investors, these distinctions are familiar. For an individual saving through a workplace retirement plan, they may be considerably less obvious. That creates an important test for the next stage of the private markets revolution.

If private assets are going to move deeper into defined contribution and wealth markets, education cannot be treated as a compliance exercise at the end of the distribution process. It needs to become part of product design itself. That means explaining not only the potential benefits but also the compromises.

Liquidity is an obvious example. An investor may understand that a private-market strategy offers access to assets that cannot be bought and sold on a public exchange. But what does that actually mean when they want to rebalance their portfolio or access their retirement savings? The same applies to valuation. Private assets do not necessarily receive the same continuous market pricing as listed securities. That can make reported volatility look very different without eliminating underlying investment risk.

Fees also matter. Invesco’s research found that participants generally associate private-market investments with higher fees and potentially higher returns. That is not necessarily a problem. Higher complexity and specialist investment capabilities can come at a cost. But investors need to understand what they are paying for.

This is where the convergence between public and private markets becomes particularly important. The objective should not be to turn private assets into public-market products. Nor should the industry assume that putting a private-market strategy inside a familiar retirement or wealth wrapper makes the underlying investment familiar. Instead, the opportunity is to build a new generation of investment products around a much clearer understanding of the differences between asset classes.

That could ultimately be more important than simply increasing the number of private-market funds available to investors. There is also an opportunity for the industry to rethink how it communicates. Invesco’s research suggests participants want greater understanding, while the survey also points to a preference for accessible, self-guided resources when learning about emerging investment technologies.

The lesson extends beyond private markets. As the boundaries between asset management, wealth management, retirement investing and private capital continue to blur, the traditional distinction between institutional and retail investing is becoming less useful.

• The products are converging.
• The infrastructure is converging.
• The distribution channels are converging.
• Investor expectations, however, have not necessarily caught up.

That creates a responsibility for asset managers, platforms, advisers and pension providers. If private markets are genuinely going to become part of the mainstream investment landscape, the industry cannot measure success simply by assets raised or the number of investors gaining access.

A better measure may be whether investors understand what they own. The private-markets opportunity is undoubtedly about access. But the next phase of that opportunity will depend on something less fashionable and considerably harder to achieve: informed access. The winners in the next generation of private-market distribution may therefore not simply be those that build the most sophisticated products. They may be the firms that explain them best.