Retail clients of Europe's fund market will, in time, account for a larger share of fundraising for private investments, according to the latest The Cerulli Edge—Europe Edition.
The number of private investment products targeting the region's high-net-worth and affluent clients is increasing significantly, the report found. Supply is currently ahead of demand and most products have relatively low assets under management. However, Cerulli Associates believes that as retail investors become more sophisticated, the introduction of private investments into their portfolios will become increasingly viable and arguably necessary to meet long-term goals.
The democratization of private investments is a route to enhanced returns and diversified portfolios. However, questions remain as to the suitability of illiquid products in retail portfolios.
Substantial demand is yet to materialize in Europe and market volatility caused by the coronavirus pandemic will test fund structures."
"Substantial demand is yet to materialize in Europe and market volatility caused by the coronavirus pandemic will test fund structures," said Andrius Dovydavicius, an analyst on Cerulli's European institutional team.
He says that managers should be prepared to field a higher number of enquiries from intermediaries, because their clients are more susceptible to panic than institutional investors during volatile markets. "However, the lack of liquidity, if appropriately advised to clients, can help shelter retail clients from impulsive decisions and boost the odds of meeting long-term goals."
The European retail market remains heterogenous in terms of opportunities to access private investments for high-net-worth and affluent clients. Investors' levels of sophistication also vary.
The European long-term investment fund (ELTIF) structure, launched in 2015, has provided a regulated closed-end structure suitable for selling private investments to retail clients, while benefiting from a European marketing passport for both retail and professional investors, provided that certain conditions are met. Currently, Southern Europe and Switzerland provide the greatest opportunity for raising assets for ELTIF products, but managers are encouraged to partner with prominent intermediaries to improve fundraising prospects.
Fund launches have remained muted, with approximately 10 funds in the market. Although ELTIFs impose restrictions that can limit their appeal to managers and intermediaries, Cerulli expects the regulated structure to gain traction. "This expectation is supported by an increase in fund launches of late. However, recent volatility may delay product development initiatives," added Dovydavicius.