What Private Fund Managers can Learn from the Underwhelming Retailization Wave

Understanding why there are still so few retail funds may be the key to success in a still largely untapped market.

If one were to judge by what has been written in the financial press in recent years, it would be impossible not to think retail investors were poised to completely take over the alternatives market. And yet, many managers – especially those on the smaller end of the AUM spectrum – haven’t found a way to access retail capital. What is getting in the way of the retailization boom?

Why retailization was said to be the next big thing

One thing that is not in dispute is that this is an investor class with immense unrealized potential. Individual investors hold approximately 50% of global AUM, but only 16% of AUM in alternatives. As noted by Preqin, “the combined capital of private wealth is equal to that of all pension and institutional money worldwide. However, half of this capital is effectively sidelined, unable to invest in the companies that make up the bulk of the economy.”

Private funds will need to tap into this capital if they hope to sustain growth at a time when many institutional investors are over-allocated to private funds. Global private equity fundraising was down 30% in 2024, the third straight year of decline. This need for new sources of capital coincides with regulatory changes, such as the SEC’s broadening of the definition of “accredited investor” to include those possessing “knowledge and expertise to participate in private capital markets.”

Investors previously excluded from private markets have reason to be interested. As Bain & Company stated, “Not only are private equity’s historically superior returns attractive (14% globally over the past 25 years vs. 7% for the MSCI World Index), but true diversification in the public markets has become harder to achieve over time.” There simply aren’t enough public companies available to properly diversify without private funds.

When we talk about ‘retail investors’ or ‘individual investors,’ it is important to understand that this term can encompass several very different classes, and targeting these different groups requires different strategies. Private funds have been more successful with some classes than with others.

How much retail capital has actually entered the private fund market?

The financial industry divides individuals into various tiers based on their wealth: Ultra High-Net-Worth Individuals (UHNWI), those with more than $30 million, have long been targeted by alternative managers through family offices. Very High-Net-Worth Individuals ($5-$30 million), in contrast, have only 3% allocated to alternatives. Because of regulatory changes, High-Net-Worth Individuals (HNWI, $1-$5 million) may now have access to alternatives through Registered Investment Advisors (RIAs) or private wealth managers.

Funds have explored different structures to target this class, including interval funds, which now manage around $80 billion, expected to reach $200 billion by the end of 2025, which sounds impressive until you realize that the total size of the private fund market is more than $22 trillion.

That is a far cry from the 50% of global AUM held by individual investors overall, and good news for fund managers who haven’t yet attempted to access the retail market – there is still a lot of opportunity out there. If private funds want retail investors, and this investor class wants to “diversify into high-return asset classes,” what has kept this pairing from taking off?

Why retail investors haven’t flocked to private funds

Many RIAs are still sitting on the sidelines when it comes to recommending private funds to their clients. These advisors build trust by protecting wealth, and have no incentive to encourage their clients to take unnecessary risks. Broker-dealers may also be hesitant to recommend long-term investment products that could cut down on the fees they are able to charge if client assets are locked in for a considerable period.

We have noted before that the interest in private funds may be coming more from HNWI than their advisors, and that they may not be prepared for the high minimums and capital calls, typical private equity management fees, or illiquidity of the private funds market. There is also a lack of familiarity: these investors don’t know the market and therefore don’t know the reputations of fund managers.

This lack of familiarity presents a problem for managers used to having personal relationships with their LPs. As Bain put it, private fund managers “can just pick up the phone and call limited partners when problems arise,” but this will not work when they have to go through an RIA, broker-dealer, etc. This can make managers hesitant to commit the resources required to go after this segment, leaving few funds for retail investors to choose from.

While 62% of millionaires live outside the USA, additional resources will be required to go after retail investors globally. In Europe, greater regulatory pressure, disclosure requirements, and new fund vehicles require an understanding of how the fund must be structured and promoted in each jurisdiction. USA fund managers without experience in the EU may need outside help when it comes to choosing a jurisdiction and strategy.

Is the retail segment worth pursuing for emerging managers?

The lack of familiarity between fund managers and retail investors means larger managers cannot rely as heavily on name recognition when raising capital among HNWI who are less likely to know their reputations. That could level the playing field for smaller fund managers who may not have the resources of more established firms but do have an incentive to target the HNWI traditionally priced out of these sectors.

Institutional investors might be wary of managers lacking well-established track records, whereas HNWI may be willing to listen if the fund offers a low minimum investment amount that is within their range. Smaller and mid-cap managers could utilize retail investors to jump-start their funds and prove their strategies to the institutional investors who may eventually make up most of their client base.

As JTC’s Michael Richards, Head of Fund Administration – US, noted: “We believe there will be greater democratization of private assets, including private equity, as more retail investors enter the market. For lower to mid-cap managers who are struggling to access big institutional investors, the retail market is a huge untapped opportunity.”

Challenges in keeping retail investors for the long term

After establishing a retail fund and finding a group of investors, the next challenge is keeping them satisfied so they invest in subsequent funds. Investors want what they are used to, but when it comes to private funds, retail investors aren’t used to anything. Insecure about entering a new investment class, they are likely to want greater access, communication, and consistent reporting. More frequent NAV updates, guidance on tax filings, and the ability to view investments online are all things institutional investors have learned to live without, but retail investors may want.

“Being able to provide data, not only to your investors, but to the broker-dealer/RIA network is probably the most important thing we’ve seen,” said Michael Richards. “In the alternative space, we never had to deal with that five years ago.”

Onboarding, due diligence, and AML/KYC procedures can potentially displease investors if they are not adequately prepared. Moreover, regulatory challenges may further complicate these processes in the future. As new legislation is passed, fund managers will need to adapt in order to ensure compliance.

If retail funds have smaller minimum investment amounts, it leads to more investors per fund. This, in turn, results in a higher number of inquiries and increased communication. Technology that can help managers communicate with a diverse investor base could be the key to keeping investors engaged and satisfied.

How funds can better cater to the retail investor class

JTC has solutions to make investor relations easier for fund managers. Our secure online portal offers 24/7 access to fund information from anywhere in the world, so you can communicate NAV information with investors at the frequency they desire.

Unlike some fund administrators, JTC works with funds at the fundraising stage, and our technology can help RIAs and broker-dealers better communicate the nuances of private fund investing to their clients. Our onboarding solution is designed to work with funds of all types and sizes, so we can accommodate both traditional and retail funds.

What really sets JTC apart is our relationships. We work with private wealth advisors all over the world. We know the challenges faced by private investors and their advisors, and we can help you cater to exactly what they need. We also work in dozens of jurisdictions worldwide, which means we can help funds expand to retail markets in the EU.

The retail market for private funds has yet to really take off, but that is good news for managers who want to initiate their first retail funds. The future is wide open, and with the right strategy and the right fund administrator, your retail fund can have an advantage over the competition.