A small tweak to regulations would unlock more flows of capital from smaller institutional investors into private markets, says Thomas Eskebaek, CEO of Titanbay.
A recent report by Bain and Company found that individual investors hold roughly 50% of the estimated $275 trillion to $295 trillion of global assets under management (AUM). Yet those same investors represent just 16% of AUM held by alternative investment funds. Regulation is what is preventing GPs from accessing this untapped capital.
Given the current macroeconomic climate, it is more important than ever that GPs have the opportunity to access this pool of capital in a responsible and sustainable way. Given the investment opportunities that private markets represent, of equal importance is allowing these smaller but still sophisticated investors, such as (ultra)-high net worth investors, as well as smaller institutions such as family offices and private banks, the opportunity to access these returns.
Despite this huge potential for GPs and LPs alike, current investment regulation does not allow for such sophisticated investors to take advantage of these returns. A small tweak to regulations that maintains investor protection while enabling the flow of capital from smaller institutional investors into private markets is all that is needed to solve the problem.
MiFID’s “professional investors”
To be clear, it is right that regulations are in place to protect investors. Any investment carries a degree of risk, and private markets, with their high investment minimums, the long-term horizon for gains and sophisticated strategies, make them one of the more complex assets to invest in. Therefore, regulations are necessary and important for investors.
That being said, the current way the MiFID II regulations, which have been in operation since January 2018, are drafted is such that any investor or organisation that does not conform to a very narrow definition of “professional investor” are prevented from accessing these opportunities.
This term is restricted to those with a suitable financial-sector role in which they have gained specific knowledge of investing in private markets or those who have gained actual experience by undertaking ten transactions per quarter.
Quantifying “specific knowledge” of investing in private markets is very difficult, and anyone who understands the illiquid nature of private markets would recognise that ten transactions per quarter are an unreasonably high number.
Instead of these dangerously high transaction numbers or difficult-to-qualify phrases, we suggest instead that the European Securities and Markets Authority, the body responsible for MiFID regulations, instead adopts amendments which set out a requirement for education or professional training in private markets. This would ensure those with a great deal of lived experience – for example, through managing family wealth without working in a specific profession – could meet these requirements, enabling them to venture into investing in private assets.
Crucially, it would ensure that investors in private markets are still protected under MiFID. Regulatory protection is fundamental to the flow of capital into an asset class, but it is important that this regulation, as the name implies, helps regulate, not hinder, the flow so that investors can benefit from highly beneficial investment opportunities in an appropriate and responsible way.
Reform would enable this otherwise overlooked group of investors to be given the same credit for their sophistication and knowledge of the markets and duly enabling them to access private markets and the returns and economic benefits made possible. The world is changing; investors are increasingly sophisticated and savvy, and provided with the right tools and education can make a significant impact with their investments.
*Thomas Eskebaek is CEO and founder of Titanbay.
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