By Abby Schultz

As pension funds, sovereign-wealth funds, endowments, and other institutional investors pare private-equity stakes to generate cash and rebalance their portfolios, Wall Street has gone looking for new buyers: retail investors who have long been shut out of private markets.

There's a good reason this buyer base is attractive. Individual investors have a lot of cash -- half of all global wealth, or roughly $140 trillion, according to Bain & Co. And they represent only 16% of assets held in alternative investments, which include private equity, the firm said in a 2023 report.

That is despite the fact investment firms have created an easier way for individuals to access private markets. Semiliquid or "evergreen" funds developed over the past several years provide a way to access private equity, real estate, and private debt for minimum investment levels -- often $25,000, but as low as $5,000 in some cases, versus $250,000 or far more for a traditional private-market fund. Semiliquid vehicles also allow investors to buy and sell shares more frequently than standard private-market funds.

Institutions have been the primary investors in these funds. But Wall Street firms are hoping to change that. Global private markets firm Hamilton Lane predicts 20% of private-market assets overall will be in evergreen funds by 2034, if wealthy individuals boost their allocations in the sector to 5%-6% from the current level of about 1%. Data firm Preqin, now a division of BlackRock, reported last fall that private wealth investments could double the size of the private-equity market to $12 trillion within six years.

There are a lot of motivations for individual investors -- particularly wealthy ones -- to want in on a part of the equity market that is growing faster than public stock markets -- with a lot less volatility -- and has historically produced strong returns.

Consider that 86% of companies with more than $100 million in revenue are private, and therefore, out of reach for individual investors, as Jon Diorio, head of alternatives for U.S. Wealth at BlackRock, wrote in a recent client note.

Though private-equity returns have been sluggish recently, over the past 10 years through June 30, private equity invested in growth and buyout strategies rose an annualized 15%, according to the Cambridge Associates U.S. Private Equity Index. That compares to a 12.9% annualized return for the S&P 500. [Buyout funds take controlling stakes in mature, private companies to boost their value].

The fact individual investors haven't widely participated in private markets means they are "getting increasingly concentrated portfolios in the public markets," says Sarah Samuels, partner and head of investment manager research at investment consultant NEPC.

Investing in private markets through evergreen structures allows individuals to get access to more diverse opportunities, Samuels says. But she also cautions that investors need to tread carefully. Even semiliquid funds aren't as liquid as public funds, and the fees on these vehicles are much higher -- generally around 1%, she says, versus an average expense ratio of about 0.34% last year for all U.S. mutual funds and ETFs, according to a recent analysis by Morningstar.

The success of private market strategies also heavily depends on the quality of the fund manager, Samuels says. The difference in outcomes between the best manager of a large-cap stock strategy and the worst is about 5%, compared with more than a 45% spread between the best and worst private-market funds in certain strategies, she says.

She suggests private-wealth investors limit their allocations to private markets to a "target range that's meaningful enough to move the portfolio, but low enough that there isn't going to be a liquidity issue."

A corner of the private-equity world that is getting a lot of attention from firms that create evergreen offerings are so-called secondaries. These are private-equity holdings that have been sold into the secondary market by institutional investors that need cash or want to rebalance their portfolios.

Some institutional investor portfolios have become top-heavy in private equity because managers haven't been able to sell companies they own in their funds, or take them public, as quickly as in the past. As a result, institutions sold $87 billion of private-equity into the secondary market last year, up from $60 billion the year before, according to a Jefferies report on the global secondary market published in January.

Fund managers sold an additional $75 billion into the market last year, up from $52 billion in 2023, Jefferies said.

Contributing to this growth has been the expanding buyer base of semiliquid funds. According to Jefferies, rising appetite from these funds contributed to a rise in average secondary prices across private-equity strategies (buyout to venture capital) from 85% of net asset values in 2023 to 89% last year.

Yet the adoption of semiliquid funds by retail investors, even wealthy ones, remains relatively low. One reason may be a "paradox of choice," says Robert Collins, co-head of private wealth at Partners Group, a private markets firm that launched its first evergreen fund in 2009.

There are many types of semiliquid funds today -- tender-offer, interval, and more -- that invest in a range of strategies, including buyouts, venture capital, and secondaries. And that is just within private equity. There are also evergreen funds investing in real estate, infrastructure, and credit, Collins says.

"There's still too much complexity," he says.

Partners is collaborating with BlackRock to simplify the options for wealthy investors by developing model portfolios that incorporate evergreen funds from the two firms according to a conservative, moderate, or aggressive risk profile.

Currently, BlackRock offers a model portfolio to the RIA market that incorporates both private and public funds, Diorio says. Its private offerings include the $1 billion BlackRock Private Credit Fund and the $300 million BlackRock Private Investment Fund, a tender offer vehicle, with quarterly liquidity of 5%, that invests in private-equity.

About two thirds of the Private Investment Fund is in co-investments BlackRock makes alongside lead managers of private-equity funds, and about the remaining third is in secondaries, BlackRock's Diorio says. The minimum investment in one of the share classes of this fund "could be as low as $25,000," he says. The stated management fee is 1.75%, but BlackRock has waived 1.10% of it since it was launched, for a fee of 0.65%.

Fee waivers of as long as three years are common in the industry today as a strategy for firms to scale up, says Jack Shannon, a principal in equity strategies at Morningstar, who warns: "Not everyone reads through the prospectus to see that a fee schedule is temporary."

In addition to management fees, semiliquid funds often charge "acquired fund fees and expenses," which are the costs a manager may bear for investing in private equity or venture capital funds, Shannon says. Some funds also charge a performance or incentive fee of 15% or 20% after returns hit a preset hurdle rate.

Although returns of these funds can be higher, they are important to consider because "fees compound over time just as returns do." he says.

And, Shannon noted, not all semiliquid or evergreen structures are the same. By law, interval funds must allow between 5% and 25% of shares to be redeemed each month or quarter, but tender offer funds aren't required to redeem shares at any specified interval, he says.

Next up for Wall Street: 401(k) investors. On May 14, retirement services provider Empower announced plans to offer a new kind of investment vehicle that will allow defined contribution retirement plan holders to invest in private markets.

Write to Abby Schultz at abby.schultz@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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June 04, 2025 03:00 ET (07:00 GMT)

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