The Investment Company Institute (ICI) is calling on the U.S. Securities and Exchange Commission (SEC) to facilitate greater retail investor access to private market investments.
Speaking at its annual conference in Washington, D.C. on Thursday, the group’s president and CEO, Eric Pan, called on the regulator to expand the ability of investors to participate in private markets, including private equity, private credit, real estate and infrastructure investments.
“The rise of private markets cannot be ignored as a fringe part of the investment ecosystem,” he said, noting that assets in private markets jumped from about US$4 trillion in 2013 to US$15 trillion by 2023, and has risen further since then.
“By one measure, private markets have already hit the US$25-trillion mark, which means their growth is accelerating even faster than expected,” he said.
This growth in private markets is coming amid a long-running decline in the number of public companies, which has dropped from around 7,300 in 1996 to around 4,300 today, he noted.
These days, companies are staying private for longer than they commonly did in the past, he said — and, as a result, there are also more large private companies operating today.
Yet retail investors have limited access to these markets, he noted, as the current rules “severely” limit how much regulated funds can invest in alternative asset classes.
“As a result, individual investors are largely stuck with the declining number of publicly traded companies, unable to meaningfully participate in the dynamic rise of private markets. Put simply, a huge and growing amount of wealth-generating potential is out of retail investors’ reach, concentrated in a dramatically smaller number of institutional hands,” he said.
Policymakers should address this disparity by facilitating greater access for retail investors, he said.
Among other things, the ICI recommended that the SEC drop the 15% limit on alternative investments by retail closed-end funds; expand the conditions for co-investment by regulated funds; and, increase access to private markets strategies in registered retirement accounts.
Eliminating the 15% limit on alternative investments “will allow fund providers to offer new products and tailor them to investors who want much more diversification and access to private markets,” he said.
As for expanding access for retirement accounts, Pan said, “We’re exploring ways to address the fiduciary liability concerns that in the past have inhibited plan sponsors from selecting target-date funds and other investment options that use private markets strategies.”
“The benefits for investors will be many. They’ll have more options through greater diversification and the opportunity to benefit from greater investment returns through less liquid structures. And funds will benefit, too. They’ll have more flexible and tailored capital needs, and the opportunity to provide their investors with a greater range of choices,” he said.
Pan acknowledged that ICI’s push to increase retail access to private markets will likely be criticized as exposing investors to increased risk.
“We agree that any such risks should be mitigated,” he said. “The fact is that regulated funds already offer the best protection” — including governance, disclosure, and diversification requirements.
“By using regulated funds to invest in private markets, retail investors will get the best of both worlds — and the protections they deserve,” he said.