Regulators Must Craft New Rules For Growing Private Markets

Private market investing has been a constant theme in wealth management over recent years. Are regulations keeping up with this? Given the issues at stake, the industry must work with watchdogs such as the SEC to ensure that a big prize is not lost, a platform business argues.

(An earlier version of this article appeared last week on
Family Wealth Report. We hope readers find this useful because the insights, while drawn from the US market, apply more broadly.)

Regulators should be encouraged to talk with wealth managers, widen investor access to private markets, and capture diversification and yield benefits, says Michael Weisz, co-founder of YieldStreet, a platform in the sector.

At present access to these areas is still a game for the richer end of the HNW population, and for large institutions. There have been tweaks, however: 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 professional knowledge, experience or certifications, rather than solely based on net worth or income.

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

Michael Weisz, co-founder of YieldStreet, thinks a constructive dialogue with regulators can clear a path forward.

“The role of the regulator is always to protect the smaller investor. Investor protection has been historically challenging due to lack of transparency, and lack of widespread information. The controls regulators historically had in place in many cases therefore made sense in that context, ”he said Family Wealth Report.

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

“Under the current model, due to lack of access, people are at times encouraged to hold` meme stocks’ and other risky public markets investments that they do not understand. They [retail
investors] are also trading against professional investors who have access to more sophisticated information and use it against them. In private markets, and especially with us, they are investing alongside professional managers. We, as an industry, don’t talk about that enough. People are being harmed by not getting access to investment opportunities that have been carefully vetted for them, ”he said.

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

The tectonic plates of how firms are owned are moving, with the share of those in private hands rather than being listed on the equity market, rising since the dotcom era of the late 1990s.

That means investors need to adjust their exposures to keep up, or they will miss a big chunk of what drives risk-adjusted returns. For example, private market investments – such as private equity and credit – have exploded 30-fold from 2000 to 30.5 trillion as of 2021, and that figure is likely to have risen since. In 2021, ALTSMARK, a US software solution firm for the private capital sector, said that more than a third of registered investment advisors could be put out of business within a decade if they do not include alternative assets in their clients’ portfolios.

To support mass adoption of private market investing, there are five foundational requirements: Access (to exciting and enticing investment opportunities), Education (so people feel that they are able to make informed decisions and mitigate risk), Model Portfolio (to eliminate choice theory issues and simplify asset allocation), Liquidity (at some reasonable frequency, as long maturities may not work for many), and Trust / Transparency, he continued.

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