A CFA Institute survey found that certain practices in private markets could be improved and some additional regulation might help.z_wei/iStockPhoto / Getty Images
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Much of the discussion around investing in private markets is positioned at the poles. Advocates point to the shrinking number of public companies, the increased correlation between public stocks and bonds, and the savvy pension funds increasing their share of alternative assets. Detractors point to transparency issues around valuations, lack of liquidity and high, complex fees.
The CFA Institute found some middle ground when it surveyed investment professionals globally last year. For the most part, survey participants said certain practices in private markets could be improved and some additional regulation might help, but they didn’t see significant problems.
The survey, released in June, focused on professional and institutional investors, known as limited partners (LPs), and their relationship with the general partners (GPs) that sponsor and manage private market funds, it also sounded a cautionary note about expanding private market access to retail investors.
Globe Advisor spoke with the survey’s author, Stephen Deane, who is the CFA Institute’s senior director, capital markets policy, in Washington, D.C.
What were the biggest concerns for investors revealed in the survey?
It was the asymmetry of information, questions about the balance of negotiating power between the limited partners and general partners, fees and expenses, and valuation.
Often, there’s a question that the GP has information but they may not disclose it. That’s where the asymmetry comes in. When the LP is negotiating to get into a fund, it’s on a bilateral basis and it’s usually with a non-disclosure agreement, so it’s not like all the investors can get together and compare notes. It’s just the opposite of that.
What are some of the concerns about increasing private market access to retail investors?
A plurality of LPs said there is asymmetry of information and there’s fear of missing out. It all adds up to the GP having almost all of the control, the negotiating power. If that’s true, if that’s something the current LPs are struggling for – these are institutional investors that are often investing millions of dollars – how is a retail investor going to fare? So, there’s the first concern: How could they possibly be effective and deal with challenges that even institutional investors such as pension funds are struggling with?
Another one is adverse selection. If you are the really big Canadian pension funds, you’re going to get the most highly sought-after funds, and it’s going to be hard to get into them. What’s left for a retail investor? If they’re just getting the dredges, that is a really big concern as well.
The report mentions feeder or intermediary funds, where institutional intermediaries offer funds of funds. What are the opportunities or concerns with these funds for the retail investor?
There are some positives. The first is you have a professional investor involved. Depending on how much money you can pool together from retail funds, it could be considerable. That could at least put your intermediary in the same position as a good LP.
Liquidity is an issue that can cut both ways. In general, it’s a big problem. The money is tied up for years. Once it’s in the fund, it’s locked in, and you either have no redemption possibilities or they’re really limited. The interval funds address that partially because they allow for periodic redemptions, so I would say that’s a real advantage. But it’s partial. It’s not complete. It may be three months, it may be six months, it may be only once a year and it’s limited. You may, as a retail investor, want to get more money out than they’re willing to redeem at that time.
Then there’s a question of investor confusion. Will investors understand the risks? Will they understand the terms?
For example, you can only redeem every six months and it’s going to be for a certain percentage of your investment, not the whole thing. And you will not know what the price is when you have to make the election to redeem. Those are some of the concerns.
This interview has been edited and condensed.
– Mark Burgess, Globe Advisor assistant editor
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