Retail investors offer funds a potentially vast new source of fresh capital, but dealing with large numbers of investors comes with distinct challenges, said speakers at a New York roadshow held recently by the Association of the Luxembourg Fund Industry.
To overcome those challenges, it is vital for GPs and their partners to invest in the right technology, said Steven Greenspan, global director of product development at JPMorgan Asset Management.
“You’re talking at a minimum, hundreds of tickets, if not thousands of tickets,” he said. “And you will not be successful unless the technology that you have – that your distribution partners have – can handle the interface with the thousands of investors from reporting to handling cash to distributions, to tax issues.”
Cyril Schopfer, managing director and head of service provider CACEIS’ US division, discussed the importance of having the proper technology in place to handle high volumes of investor activity.
He noted that funds for individuals tend to have monthly subscription periods, usually during the second half of each month. CACEIS uses a digitized onboarding process to handle this activity. He also suggested that AI chatbots could be used to handle larger volumes of investor inquiries, though it wasn’t clear whether CACEIS does so itself. Some may consider chatbots a risky tool to use for handling legally binding answers to investor questions, given their limitations.
Schopfer also noted that, while more investors means a higher volume of reporting, reports to individual investors are more standardized than those for institutional ones.
And it’s not just investors that rise in number when funds look to tap the retail market. Schopfer said that sponsors also face dealing with “a large number of distributors.”
GPs can outsource distribution-related tasks to firms such as CACEIS, Schopfer noted, including services that automate order flows and handle rebates.
ELTIF 2.0 to further growth opportunities
A recent overhaul in European regulations will further expand opportunities for fund managers in the region.
Reforms to the European Long-Term Investment Fund, known as ELTIF 2.0, took effect in January, although EU officials are still working on an accompanying regulatory document that covers redemptions and fund costs.
Stefan Staedter, a partner at Arendt & Medernach, said an important change is that ELTIF 2.0 more clearly allows investing in assets far beyond Europe.
“This has been clarified again in the regulation,” he said.
On the flip side, ELTIF 2.0 funds can be regionally distributed because they use the EEA’s cross-border passport, per an ALFI primer on the changes.
The rule also allows for semi-liquid funds. The previous regime only allowed for liquidity at the end of a fund’s life.
“I really think that’s where the growth is going to be in the retail space,” Greenspan said about the vehicles.
The rule also reduced the minimum that ELTIF 2.0 funds need to invest in long-term assets from 70 percent to 55 percent.
Eligible assets include private equity, credit, infrastructure and real estate, per the guide. And fund of funds ELTIFs are now permitted.
The 55 percent level will help with providing liquidity to investors who want it for life events, Staedter said.
This concept has already been put into practice.
Partners Group launched an evergreen private equity ELTIF earlier this month, affiliate title Private Equity International reported. While the fund offers partial monthly redemptions, Partners Group eschews the “semi-liquid” label out of concern that using it will lead investors to think the vehicle offers more liquidity than it actually does.
And an ELTIF catering to retail investors can borrow at amounts of up to half of its net asset value, the ALFI guide notes. But ELTIF funds targeting professional investors – those that meet criteria in sophistication and resources – can borrow up to their full NAVs.
Aggregate exposure limits and minimum ticket size requirements for retail investors have also been removed in the new regulations. Staedter noted that the only requirement for adding retail capital is to conduct a suitability test.