Q: Hugh, how would you describe the current funding challenge in private equity?

Hugh MacArthur: For the first time since the global financial crisis, PE capital – traditionally provided by big institutions – is under strain. The macroeconomic climate has forced institutions to retreat, with PE fundraising falling 24 percent last year compared to 2023. Private equity was built by institutions with mighty pools of long-dated capital and patience measured in years. Now, many of those same institutions have slowed their commitment pace.

Q: What’s the good news for the industry?

MacArthur: There’s a new source of fuel: private wealth. Today, high-net-worth individuals and retail investors are the fastest-growing investor class. They are now key to keeping the $5tn private equity engine going.

This shift is already reshaping how capital is raised, how funds are structured, and who wins and loses in the next chapter. It’s demanding a completely different experience – more liquid, more transparent – and putting pressure on the industry to modernize.

Q: How big is this private wealth opportunity?

MacArthur: Roughly half the world’s wealth today is held by individuals, equivalent to around $150tn. Yet they currently make up just 16 percent of the AUM of alternative investment funds.

Our prediction is that over 25 percent of the funds coming into PE over the next decade will come from individual investors. That’s seismic. It also means this isn’t just a temporary stopgap; retail money is here to stay as a major pillar of private markets.

Q: Why is demand from individuals rising?

MacArthur: Several tailwinds are happening on the investor side. Firstly, retail investors want diversification beyond U.S. tech stocks. The long-term returns of private markets offer a competitive alternative, beating public stock performance on average globally over the past 10 years.

Secondly, we expect regulation to ease access to retirement money (the largest category of retail capital). Defined contribution plans in the U.S., like 401(k)s and IRAs, are currently blocked from private markets (unlike pension funds), but that is now expected to change – investors, fund managers, brokerage firms and retirement plan administrators all see the upside.

In my experience, when everyone wants something to happen, it usually does. Retirement capital is long-term, sticky, tax-efficient, and liquidity needs are lower, making it an obvious PE candidate. It’s not a question of if, but when.

Q: What challenges do firms face in attracting individual investors?

MacArthur: Opportunity aside, this is not an easy shift.

Undoubtedly, the biggest hurdle is that this is uncharted territory for individual investors. That means they’re not quite sure how we work – or who we are. We survey ultra-high-net-worth individuals every year, and every year they struggle to identify the world’s biggest private equity firms.

That means major firms will need to get into the marketing game to build a brand, largely for the first time. It will also require serious education; we need thoughtful guidelines to avoid overexposure or mis-selling. One shouldn’t underestimate the magnitude of the challenge or the costs this will add to the sales process.

Also, individuals are incompatible with the traditional PE playbook of opaque, closed-end funds. Individual investors demand better digital experiences: instant reporting, mobile applications, and transparent pricing.

Remember, this is a group that’s accustomed to seeing live data on their stock portfolios. Individuals also want ease, clarity, and liquidity; they aren’t going to buy into capital calls, long lockups, and tax forms that require a CPA to decode. We need to make PE investing seem as simple as a Vanguard ETF.

Operationally, onboarding these individuals will also demand the opening of thousands of small accounts, each of which needs appropriate support infrastructure and regulatory compliance. That’s going to require a comprehensive revamp of PE tech stacks.

Q: So, in short, how can firms actually win in this new environment?

MacArthur: Three strategic adjustments are needed to woo individual investors:

1) Develop Semiliquid Products: Firms must develop, or partner with, investment vehicles with lower minimums and more liquidity to accommodate private investors. Take, for instance, the new breed of “evergreen products,” open-ended funds, or single-check products that look and feel more like a mutual fund than a traditional PE vehicle. I also expect some savvy GPs to create products compatible with 401(k)s and IRAs in anticipation of regulatory change. The transition to more open-ended, liquid, and transparent products is key. The experimentation we’re already seeing here is encouraging.

2) Enhance Distribution Channels: PE firms can partner with private banks, wirehouses, and registered investment advisers to access individual investors. They need to start investing in these relationships. This applies to middle-market PE firms, too. Some may think: “I can’t afford to have 200 people on my investor relations staff chasing all of these private wealth folks.” But that’s not the right answer. There are lots of different ways to find private individuals.

3) Invest in technology and specialist staff: There’s a big technology leap needed to provide individual investors with real-time performance data via their smartphones and onboard them. That needs to start now. Firms also need to build dedicated teams focused on private wealth management to provide tailored services and support. There’s already increased competition for this talent.

Q: How do you see the industry evolving in response?

MacArthur: In short, we are heading toward a more democratized, more digital, and more dynamic private markets industry. The question isn’t whether individual investors will play a larger role, but rather, who will position themselves to capitalize on this inevitable shift?

The winners here will be the first movers. This is a competitive pool of capital, and the margin for error is slim. And it can be done. Look at Blackstone, where 23 percent of its total $1.1tn assets came from private wealth in 2024, including $23bn in inflows to its semiliquid* products aimed at retail investors.

Private equity can – and must – adapt. Not so long ago, quarterly mark-to-market reporting once felt radical. Now, it’s standard. It will be the same with daily pricing, not because it makes sense for five-year holds, but because the end investor expects it.

We shouldn’t be obsessing over whether this change is rational by private market standards. Instead, funds need to ask themselves, ‘Are we willing to meet investors where they’re at?’

*Semi-liquid funds typically have a one or two-year ‘soft lock’, where investors pay a penalty fee to cash out. After that, they can exit on a monthly or quarterly basis, subject to approval.

The views expressed in this publication are the personal views of Hugh MacArthur and do not necessarily reflect the views of the EQT AB group ("EQT") itself or any investment professional at EQT.