In Europe, retail brokers and traditional investment managers are facing growing legal and reputational risks from their efforts to expand access to private assets for affluent and mass retail clients, says Fitch Ratings.
In a new report, the rating agency noted that retail brokers and fund managers are increasingly offering investments based on a variety of private assets — including private equity, private credit, real estate and infrastructure — to meet growing client demand amid “fear of missing out amid ebullient markets.”
Additionally, regulatory reforms to enhance retail investors’ access to long-term investment funds have also made it easier for firms to put retail investors into private asset investments by lowering the investment minimums, it noted.
In this environment, Fitch said that it expects more brokers and fund managers “to follow this trend as private assets are increasingly treated as a core component of client offerings.”
As a result, both investors’ exposure to private assets, and risk, “could grow swiftly,” Fitch said.
In particular, while these products are often structured to provide some liquidity to retail investors — by providing quarterly redemptions, or on internal secondary markets — these investments “may mask valuation and liquidity issues from retail clients,” it said.
“Liquidity expectations could be hard to meet in a downturn, especially if secondary pricing gaps widen as mark-to-model basis valuations of private assets may lag underlying performance,” the report said.
And, while these products typically provide comprehensive disclosure of these risks, “retail investors may not fully appreciate these factors, which could lead to heightened reputational and litigation risks and increased regulatory intervention if redemptions are delayed or valuations significantly discounted,” Fitch warned.
Additionally, industry trade groups have also recently cautioned about potential conflicts of interest that can arise when fund managers run retail evergreen vehicles alongside institutional closed-end funds, “reinforcing the need for strong conflict controls and clear disclosure.”