Capital Markets Insights

The Growth of Retail Investors: How to Leverage Retail Capital

In February 2021 we saw Game Stop stock headlines bringing retail investors into the focus of mainstream media. Although this specific case seems to have polarized the market commentary, it undoubtedly made everyone realize how much power this group of investors can have.

Retail investors are increasingly displaying an appetite for investment opportunities in both private and public markets, seeking out optimal returns wherever they can be found. That being said, private capital has always been dominated by large institutional investors and servicing the retail sector came with it a host of scaling challenges for organizations.

These challenges can be resolved with software solutions that alternative investment groups can leverage to market investment opportunities, execute subscription documents, and fulfill orders for their investors directly, or via financial advisor networks. Software can eliminate the inefficiencies, human error, and investor relations challenges that had firms concentrating their energy on high net worth and institutional investors. 

Working with Retail Investors

Working with retail investors means processing a much higher volume of transactions for each deal to get funded. Companies need to have automated, scalable systems in place for all the key investor processing workflows in order not to find themselves drowning in paperwork.

Much of the industry is not quite yet embracing retail investors and some are still reluctant to take on individual investors.  But if bringing retail investors aboard is going to create operational challenges then surely the companies are just going to keep doing things the conventional way?

Well, it’s starting to seem like the industry leaders are finally deciding that the opportunity cost of staying the course is getting too high. For several years now, Blackstone has been at the forefront of the market move towards retail, and now others are starting to follow their lead and source capital from the retail segment. 

Below, we’ll take an in-depth look at the factors driving the market shift as well as what this means for all stakeholders by examining:

  • Growth of Private Investments
  • Draw of Private Investments
  • Impact of Regulation
  • Ways Firms are Capitalizing on the Opportunity

The Growth of Private Investments

Despite being less accessible and less liquid than public markets, private capital markets have recently seen strong growth. According to a report by Prequin titled “The Future of Alternatives”, private equity will overtake hedge funds as the asset class with the highest alternative AUM by 2023.

At the same time, retail participation in private market investments has also been growing steadily. In the report titled “Expanding Retail Access to Private Markets”, presented to the SEC by Blackstone, it was revealed that retail investors make up 45% ($68 trillion) of the private market investor base.

There has also been an ∼ 15% increase in retail demand for alternatives between 2019 and 2021, which starts to account for a significant statistic in the market's growth.

Draw of Private Investments: Chasing Alpha

The demand in private markets is largely driven by the fact that investors are finding more opportunities for outsized returns. According to Blackstone: “From 2008—2017, alternative asset strategies posted positive returns with substantially all providing an average return exceeding 10% through the period.”

One reason for this might be something that has been traditionally considered a drawback of private markets – the fragmented nature. Consider stocks on a stock market. If there’s new information coming out, capable of influencing the stock price, the moment that news hits it's almost immediately priced into the stock. The reality of this is that passive management strategies outperform active management in public markets.

In private markets the performance is very much manager-driven and there is a high dispersion among managers. This means that those with high performing strategies are really able to set themselves apart in private markets. 

Impact of Regulation

The Securities and Exchange Commission (SEC) has recently brought new rules, which will allow retail investors access to private funds. As SEC Chairman Jay Clayton states, this change will provide sophisticated individual investors with opportunities to diversify their investment portfolios. 

Even more significant than diversification perhaps is the democratization of private markets. Opening up these investment opportunities to retail investors will provide many with some much needed alternatives. 

Commenting on this, SEC Chairman Jay Clayton said the following: 

“When retail investors participate in our markets, how broad a spectrum of investments do they have? I think that spectrum has been getting relatively smaller. Because we have fewer public companies, companies are waiting much longer in their life cycle to go public, which by definition means that retail investors have less access to the market as a whole. And I fear, less access to companies that are well-established, but still growing.”

Ways Firms are Capitalizing on the Opportunity

All of the industry themes above only become meaningful when firms provide adequate investment opportunities. For organizations to be able to adequately capitalize on private market trends going forward, having a strategy that includes retail investors is a must. 

The current state in many firms prevents them from fully capitalizing on the market opportunity at hand due to:

  • Highly manual workflows make it cumbersome to work with retail channels 
  • Disparate systems and processes
  • Clunky, cumbersome legacy software
  • IT unable to provide solutions and feasible options

To touch on Blackstone’s example, they “invested heavily to build a powerful platform advantage.” Of course, building a custom solution on such a massive scale requires in-house expertise that few investment firms have. 

For those organizations looking to avoid complex development projects, fintech solutions offer a quicker and more realistic path.

Katipult Equity Capital Markets Platform for Private Markets

Katipult is an award winning, proprietary cloud-based software infrastructure to digitize and automate private placements, while providing best-of-breed standards for eliminating transaction redundancy, enhancing investor experience, and accelerating deal flow.

Katipult will equip your investors and investment advisors with all the capabilities necessary to fully automate key processes such as:

Interested to improve retail investor servicing with your own digitized investment platform? Contact us and Learn More!