Regulators must craft new rules for the growth of private markets

Private markets investing has been a consistent theme in wealth management over the past few years. Does the regulation follow this? Given the stakes, the industry needs to work with watchdogs like the SEC to make sure a big prize isn’t lost, claims a platform company.

(An earlier version of this article appeared last week on
Family Wealth Report. We hope readers find this useful as the information, although drawn from the US market, applies more broadly.)

Regulators should be encouraged to talk with wealth managers, expand investors’ access to private markets and seize the benefits of diversification and yield, said Michael Weisz, co-founder of YieldStreet, an industry platform .

At present, access to these areas remains a game for the wealthiest part of the HNW population and for large institutions. However, there have been adjustments: on August 26, 2020, the Securities and Exchange Commission adopted amendments to expand the definition of “accredited investor”. The changes allowed individual investors to qualify as accredited investors based on defined measures of knowledge, experience or professional certifications, rather than based solely on net worth or income.

For many months, this news service has chronicled the initiatives of various companies such as Moonfare (Europe), CAIS (USA), iCapital (USA) and ADDX (Singapore) to make access to alternative investments more effective and, ultimately, more “democratic”. .” Even for HNW investors, ticket sizes started from $1 million or more, making it more of an ultra-HNW game. But that’s unsustainable, it is argued, because it means millions of investors are forced to hold listed stocks, conventional bonds and other assets that don’t deliver the goods. Rising inflation and interest rates further raise the stakes.

Michael Weisz, co-founder of YieldStreet, believes constructive dialogue with regulators can pave the way.

“The role of the regulator is always to protect the small investor. Protecting investors has always been difficult due to the lack of transparency and the general lack of information. So the controls that regulators had historically put in place in many cases made sense in that context,” he said. Report on the family patrimony.

“Today there are much more sophisticated ways to communicate with retail investors, for example using technology. While regulators should continue to require the right levels of disclosure and education for the benefit of the retail investor, they should promote rather than restrict access to private markets,” Weisz continued.

“Under the current model, due to lack of access, people are sometimes encouraged to hold ‘meme stocks’ and other risky investments in public markets that they don’t understand. They [retail
investors] also trade against professional investors who have access to more sophisticated information and use it against them. In private markets, and particularly here, they invest alongside professional managers. We as an industry don’t talk about it enough. People are being harmed by not having access to investment opportunities that have been carefully selected for them,” he said.

The situation seems to be changing. In September 2021, an SEC advisory panel voted to recommend making it easier for less wealthy people to invest in private funds. The SEC’s Asset Management Advisory Committee has approved a report recommending that the regulator increase access for ordinary investors to private equity, private debt and real estate vehicles (The Wall Street Journal, September 27, 2021).

The tectonic plates of corporate ownership are shifting, with the share of those in private hands rather than listed on the stock market increasing since the dotcom era of the late 1990s.

This means investors need to adjust their exposures to keep pace, otherwise they will miss out on much of what drives risk-adjusted returns. For example, investments in private markets – such as private equity and credit – increased 30-fold from 2000 to $30.5 trillion in 2021, and this figure has likely increased since then. In 2021, ALTSMARK, an American software solutions company for the private capital sector, said that more than a third of registered investment advisers could be decommissioned within a decade if they do not include alternative assets in their clients’ portfolios.

To support the mass adoption of investing in private markets, there are five fundamental requirements: access (to exciting and attractive investment opportunities), education (for people to feel they can make informed decisions and mitigate risk), model portfolio (to eliminate choice theory issues and simplify asset allocation), liquidity (at a reasonable frequency, as long maturities may not work for many) and trust/transparency, he continued.

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