The views presented here do not necessarily represent those of Advisor Perspectives.
As more retail investors gain access to private markets, advisors should be careful to communicate the risks, and not just the potential upside, of diving into these alternative investments.
“It’s a space that we’ve been fairly cautious on, with the ‘retailification’ of particularly private equity, and it’s for a couple of reasons,” Jason Blackwell, chief investment strategist at Focus Partners Wealth, said.
“One, this is a space where there is truly an information disadvantage that retail investors have,” Blackwell said, noting the dearth of public filings to access private company performance.
For fund managers or institutional investors with dedicated resources to research private companies and markets, there may be opportunities to use that information to their advantage, Blackwell explained. But most retail investors are not in a position to have that competitive, investment edge.
“A retail investor is not going to have that information,” he said. “They are often going off of news reports and the glossy presentations that the company wants them to see. Also, a lot of the value in private equity comes from being able to shape the underlying company’s outcomes.”
Institutional investors can often give private companies strategic advice, for instance, which might include introducing firms to new clients or investors, allowing them to “change the growth trajectory of a business by being active owners,” Blackwell said.
“A retail investor just doesn’t have those levers to pull. They are hoping that someone else is going to pull those levers for them, and they will be able to ride along. But we do believe that puts those investors at a disadvantage,” Blackwell said.
Greater Access to Private Markets
There has been a growing push from Wall Street and Washington to give retail investors expanded access to private markets.
Robinhood recently launched a new fund for individual investors, Robinhood Ventures Fund I, in an attempt to “democratize access to private markets globally, building on our launch of private tokenized stocks in the EU earlier this year,” the company said in a Sept.15 announcement.
This summer, President Trump also signed an executive order, “Democratizing Access to Alternative Assets for 401(k) Investors,” opening a path for alternative investments, such as private equity, real estate and digital assets, in 401(k) plans.
If they plan to enter the fray, retail investors should have a true understanding of their risk appetite as well as their liquidity needs (vs. the liquidity profile of the funds they invest in), Blackwell shared.
“When you invest in private companies, you probably need even more of a diversified portfolio. You do have more companies that don’t work out, because they haven’t been proven in the public markets yet. Also, it’s important to make sure you have the (investment) time horizon — that could be 10 plus years,” he said.
While this doesn’t exactly mean that individuals who are close to their retirement years should avoid private equity investments, they do need to pay extra attention to liquidity factors, Blackwell said.
“It’s a little bit about how close they are to retirement, although most people live well into their retirement years. But understanding what their liquidity profile is, and sizing it appropriately, is key,” he said.
“It may be easier to buy (shares in private companies) but that doesn't make them any easier to sell,” he added.
A Benchmark for Public and Private Companies
In September, Morningstar and PitchBook introduced an index that, for the first time, tracks both public and private market companies in a single index.
“Unlike traditional benchmarks capturing only publicly listed companies, the Modern Market 100 blends the largest US-listed companies with the most significant late-stage venture-backed private companies,” an announcement from Morningstar said.
In a phone interview with Advisor Perspectives, Sanjay Arya, the head of innovation at Morningstar Indexes, shared that the new benchmark will “be able to provide a more holistic picture of the equity market, where you can look at public and private leaders side by side.”
“There’s been a number of artificial intelligence thematic ETFs (launched), for instance. On the public side there are companies, but there is more innovation happening on the private side,” Arya explained.
Since more investors are considering private companies as part of their opportunity set, Morningstar introduced its benchmark. Arya did discuss the risks that may be presented to retail investors gaining more exposure to this asset class, however.
“Private companies are private, so they don’t disclose a lot of the information that is accessible to people who invest in public markets. And they are not as liquid as public securities either, so if you want to go in and out of securities, it’s not as easy,” Arya shared.
“You have to go in with eyes wide open and know what you’re doing. Someone who knows that market well can enable you to do that,” whether that be a fund manager or an advisor, he shared. “Our view is that, over time, this market will become more accessible to retail investors.”
Danielle Walker is a freelance journalist with 15 years of business reporting experience. She previously worked at Business Insider and Pensions & Investments, among other business publications. Her work has been published in the Financial Times, Barron’s and Chief Investment Officer. Danielle is currently based in Norfolk, Virginia.
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The views presented here do not necessarily represent those of Advisor Perspectives.
