Kay McCarthy, Head of Jersey Office at The International Stock Exchange (TISE), explores the democratisation of private equity and the role being played by technology and innovation.

The number of companies listed on public markets has been gradually falling over the last three decades. Some sectors are now no longer represented and many stock markets are no longer providing sufficient diversification. We are seeing that more and more businesses are remaining privately owned and a significant number are funded by private capital.

Private equity investment provides many growing businesses with an important lifeline. It offers access to growth capital that may be difficult to find elsewhere, coupled with providing a reliable, planned sequence of funding over a long period of time as companies reach growth milestones.

Accessing private deals

Traditionally, this type of private transaction has been closed off to individual investors and the only way to access private deals was generally through closed-end funds. Historically, this exclusive asset class has been dominated by pension funds and other large institutional investors who can withstand the historic challenges of high minimum investments and long holding periods, often years.

According to the 2023 Global Private Equity Report by Bain & Company, the increased interest in private equity is largely related to consolidation among public companies. The report states, “the number of public companies has declined in recent decades, leaving public investors closed off from large parts of the global economy.”

"In the past, they have been able to adequately diversify through the public markets, but now they are looking elsewhere in a quest for both diversification and better returns."

Investors and their wealth managers are also aware of the performance of private equity, which has been impressive when compared to the stock market. In the past, they have been able to adequately diversify through the public markets, but now they are looking elsewhere in a quest for both diversification and better returns.

This shift has also been driven by changes in regulation, the emergence of fintech platforms, and new investment structures that cater to retail investors. Regulatory changes in Europe and the US have played a significant role in opening up this market and innovation will be key to making private markets accessible.

Accessing new capital

This increase in demand among individual investors coincides with increased interest from private equity firms in finding new sources of capital. Individuals now find themselves on a more level playing field with major investors, like sovereign wealth funds, as they seek potentially higher returns and diversification benefits.

This shift is even more pertinent given how quickly private markets have grown over the last decade, with assets under management (AUM) having more than tripled to US$11.8 trillion in 2023. This is set to continue, with analysts at Preqin predicting AUM to surpass US$18.3 trillion by 2027.

"Individuals now find themselves on a more level playing field with major investors, like sovereign wealth funds, as they seek potentially higher returns and diversification benefits."

The democratisation of this market is seen as the next important step in the transformation of private equity into a fully mainstream asset class and in turning its managers into household names. As these changes continue to unfold, the private equity industry will likely evolve, creating new opportunities.

Democratisation at play

Meanwhile, the landscape is fast evolving, there are already a small number of digital platforms enabling retail investors to secure allocations in private equity and venture capital funds. In parallel with this, many of the large investment banks and private asset managers are looking at ways to attract vast retail savings as alternative sources of capital.

In January, Blackstone raised approximately US$1.3 billion for a private equity fund that is tailored to individual investors. Other large private asset managers such as KKR and Apollo have launched similar retail focused funds.

"With regulatory changes, technological advancements, and innovative investment structures, private equity is becoming more accessible and transparent..."

Blackstone has said that retail assets under management could rise from US$200 billion to US$500 billion, while KKR has said it expects individual investors will eventually account for between 30% and 50% of new capital raised, up from 10% to 20% currently.

With regulatory changes, technological advancements, and innovative investment structures, private equity is becoming more accessible and transparent, potentially changing the industry landscape in the years ahead.

TISE Private Markets

Last year, TISE launched a unique private markets solution, TISE Private Markets. It provides unlisted companies and funds with a dedicated marketplace through which they can access an integrated set of tailored electronic solutions, including trading, settlement, and registry management. As well as the delivery of this service to the first client company, Blue Diamond Limited, TISE has developed a pipeline of other prospective clients for its private market offering.

With technology playing a major part in democratising access to private equity, platforms such as TISE Private Markets are ideally positioned for developing secondary markets for private funds. This technological innovation enables liquidity events which provide an exit strategy for funds and allow exit and entry opportunities for a diversified group of investors. There are robust growth opportunities in private markets and innovation will continue to play a key role in its development as the landscape evolves.

This article was originally published in the Jersey Evening Post, September 2024.