Private markets: for so long, it seemed like the clue was in the name.

These exclusive investments have historically attracted interest due to their potential for attractive returns, guided by experienced general partners. But, of course, they were only available to a favored few – vast institutions that could handle the eye-watering minimum investment size and not worry about locking up their money for extended periods.

However, change is afoot. Or rather, it is already here.

Source: Prequin

A great democratization is underway, with opportunities in private markets being made available to a much broader range of investors, including individuals. One of the most popular emerging products for individuals is so-called evergreen or open-ended funds, which tend to have far lower minimum ticket sizes and significantly less restrictive rules around how long capital must remain locked up. According to Prequin data, the number of evergreen funds spiked from just over 100 to more than 500 in the decade from 2013 to 2023.

Institutions such as pension funds, endowments, foundations and family offices have increased their allocations to private markets in recent years. On average, all now allocate more than a fifth of their holdings to such investments, and often considerably more. Among the reasons for increased interest in private markets are their potential for attractive returns, different risk profiles compared to public markets and a decline in the share of the investable universe that is publicly listed. Indeed, a new generation of technology-driven companies have not needed to turn to the public markets for funding, instead preferring to tap venture capital and private equity. The fact that this strategy affords them a longer-term view and requires less time and money to be spent on quarterly reporting is an added bonus. As of 2023, only about 15 percent of companies with revenue over $100m were publicly held, according to a Bain & Co. report.

There is a question mark as to whether, in percentage terms at least, institutions’ allocations to private markets will go much higher than their current level. But individuals – particularly high-net-worth and very-high-net-worth individuals – are a different story.

Individual investors hold roughly half of all global wealth but account for a much smaller share of private capital AUM.

According to Bain analysis, the percentage of the average very-high-net-worth individual’s ($5-30m in investable assets) portfolio allocated to alternatives is around 5 percent, with high-net-worth individuals ($1-5m) and the mass affluent ($100,000 to $1m) being close to zero. (Alternatives is the umbrella name given to investments outside traditional stock and bond markets, including private equity and venture capital.)

When you consider that individuals, including family offices, account for more than half of all global wealth – some $140tn to $150tn – the amount of headroom for potential growth in this asset class starts to hit home. Little wonder that a former partner of one of the largest private markets firms in the world told me recently he expected the total amount of capital invested in the industry to double from $10tn to $20tn in the next decade. The figures depend on how you measure the asset class, but some suggest growth could go even further, even faster. For its part, Bain projects that individual wealth invested in alternatives will grow 12 percent annually between 2022 and 2032. (That’s compared to 8 percent annually for institutional investors over the same period, which is not to be sniffed at either.)

Source: Bain

So, what happens next?

Well, along with the benefits that have attracted smart money from institutions for many years, there are drawbacks and risks. Some of these have already been encountered by individuals investing in evergreen funds.

There was a notable cautionary tale in late 2022, when one of the largest private markets firms in the world restricted withdrawals from a flagship evergreen fund that had been open to individuals investing as little as $2,500. (It’s not unheard of for private market funds designed for institutions to have a minimum ticket size of $25m.) The decision to restrict withdrawals was completely legitimate and within the agreed terms that should have been familiar to all investors. However, there was still a certain dissonance, as well as a large number of headlines and column inches, when it happened. Indeed, after its fund was temporarily gated, the firm delayed the planned launch of a major new private equity fund that had been designed to allow wealthy individuals to invest in corporate buyouts and other strategies.

The reason for the queasiness, surely, was that while evergreen private markets funds have been engineered to be more accessible to individual investors, they are, in some important respects, unlike the products in which these consumers usually invest. It will take time for the new rules of engagement to feel “normal” to this type of investor.

This is just the tip of the iceberg. For many individual investors, the phrase private markets still conjures up images of “Barbarians at the Gate”, the seminal account of KKR’s leveraged buyout of RJR Nabisco in 1988. But “private markets” is a broad church, which ranges from swashbuckling private equity deals all the way through to real estate and rather staid, conservative private credit.

The equation for investors new to the space is further complicated by the breadth of opportunities in this burgeoning market – including direct investments, evergreen funds and ETFs – and also by the option to invest with specialist private markets firms themselves or to choose to work with intermediaries such as wealth management firms and private banks. That’s before they’ve even begun to consider the different fee structures or the methods used to value the underlying assets.

While there’s plenty for individual investors to get their heads around if they are to make the most of the opportunities on offer, the same is true for the people providing access to them. It seems inevitable that the world of private wealth – which I cover in my day job as editor of Spear’s Magazine – will become increasingly enmeshed with the world of private markets. This coming-together will change the game for those operating on either side of the aisle.

It is an apposite time, then, to let you know that I will be writing a regular column here, charting the forces shaping the private wealth sector and the fortunes of the individuals and companies within it.

As I say, change is afoot.

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