In practical terms, however, a lot more education has to go into steering retail investors away from a “show me the money” mindset and toward being comfortable keeping assets invested for longer periods. That’s why Veronis believes a retail investor’s portfolio should tap out at a private equity allocation between 5% and 15%.
Gallison added, “There will be years when it looks like [a private equity investment] is massively underperforming and there will be years when it looks like it’s outperforming massively … the key is keeping emotions in check.”
Comfort may come in the due diligence process retail investors are exposed to. Deep knowledge and understanding of how and why an investment is performing can provide solace for down-market jitters.
Ironically, the risk of holding an illiquid investment is outweighed by a lack of portfolio diversification for most investors. “Less access to private companies means retail investors are missing out on the opportunity for excess or uncorrelated returns,” the Blackstone report notes.
“When retail investors participate in our markets, how broad a spectrum of investments do they have?” asks Jay Clayton, chairman of the SEC, in the same report. “I think that spectrum has been getting relatively smaller. Because we have fewer public companies, companies are waiting much longer in their life cycle to go public, which by definition means that retail investors have less access to the market as a whole. And I fear, less access to companies that are well-established, but still growing.”
One of the FSI panelists, Matt McPeak, a vice president at Owl Rock, an alternatives asset manager, said, “There has been incredible growth in the private markets over the last 15 years.” He said $300 billion flowed into the U.S. private equity market alone last year. Since fewer companies are going public and more public companies are going private, that leaves traditional public capital market retail investors out in the cold—until they warm to the concept of illiquidity and deeper due diligence with their investments.