Retail investing has long proved a tantalizing prospect for private equity players. Traditionally a space for limited partners with huge asset pools, like family offices, endowments, pension programs, high net worth individuals (HWNI) and more, private equity funds saw their doors open just slightly more to retail investors in May. That move by SEC Chair Paul Atkins saw the previous 15% limit on private funds in closed-end funds removed. With the second half of the year in gear, then, what might the future hold for private equity — and the retail investors potentially interested?
Why might those investors be interested in the first place? Following a strong 2024, the S&P 500 has returned a disappointing 7.7% YTD. That trails last year’s 25% return according to YCharts data. For those investors with longer time horizons, expanding into the private equity space could help add some “alternative” exposure to standard equities.
What, then, is the outlook for private equities themselves, and the outlook on retail investor access? Here are three thoughts on that outlook for the second half.
After Asset Dropoff, Private Equity AUM to Rebound?
After almost two decades of continuous AUM growth, private equity AUM dropped in 2024, according to Bain & Company. Furthermore, according to Investopedia global deal volume saw some postpandemic recovery between 2023 and 2024, rising 22% from $1.3 trillion to $1.7 trillion.
One factor that has contributed to that slowdown in deals and reduced asset inflows may be private equity holding periods. Those periods — the length of time private equity firms hold investments before selling them off — have grown by almost a full year on average. That's almost 12 months of liquidity being locked up in ambitious, but complicated, arrangements.
That growing waiting period may reflect how high interest rates have impacted deal valuations. Appealing financing costs around the time of the pandemic have since risen precipitously amid serious inflation. That has significantly shifted the “valuation expectations” of buyers and sellers looking to make deals according to S&P Global analysis.
Should rates ease in the second half and other exogenous geopolitical factors don’t intervene in the interim, the private equity machine may start humming again to previous levels.
New Technology & Growing Retail Access
Amid that aforementioned uncertainty regarding private equity AUM, “retailization” becomes a very attractive trend. A Deloitte Center for Financial Services assessment from earlier this year projected exponential private market allocations in the retail crowd. Specifically, that analysis projected retail investors’ allocation to grow from $80 billion to an eye-watering $2.4 trillion in the United States.
Already, investors can use the ETF wrapper to get exposure to private equities. The Invesco Global Listed Private Equity ETF (PSP), which launched back in 2006, stands out in that group. ETFs offer plenty of benefits that could make them the vehicle of choice for private equity retailization. Active management, too, could help construct the right private equity strategies in the wrapper.
That said, other options do exist. Interval funds, of course, provide one option. The previously mentioned reform to closed-end funds provides an additional — and for now, more accessible — route into large-scale retail private equity exposures. Furthermore, various retirement and insurance plans, like those offered by Empower, have increased the availability of private equity options.
Intriguingly, as well, Capital Group recently announced a new public/private equity fund, crafted alongside KKR. That follows two prior public/private interval funds from the pair of firms. Cesar Estrada, head of private markets at Arcesium, wrote in AlphaWeek that data and technology improvements have also helped private markets, with better monitoring and reporting tools playing a helpful role.
Greener Pastures Ahead?
Uncertainty has defined a lot of private equity decisions in recent years, and that has been reflected in the AUM and deal numbers. That said, should some of those limited partners finally sell their positions — even at a loss — it could shift overall expectations to the current higher rate environment.
A recent report by Upwelling Capital Group made the suggestion that selling at a loss could present a strong opportunity for the broader space to reset. Waiting too long, the white paper found, almost guarantees a decline in fund performance. Should, then, the space see a wave of fresh acquisitions, bringing the average holding period down, it could be a good time to get started with a private equity allocation.
Taken together, the private equity outlook offers an appealing alternative for portfolios. Whether a traditional private equity investor, or an advisor with retail clients, readers may want to keep an eye on the powerful and changing private investing world.
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