Opening up alternatives for retail investors across Europe

Historically, the alternative asset space has been occupied by specialist fund managers catering to professional investors – from institutions to wealth managers – and experienced (or ‘well-informed’) high-net-worth individuals (HNWIs). More recently, however, a number of factors have coalesced to open up this market, with alternatives becoming more widely available to retail investors who previously would have difficulty accessing such asset classes. 

On one hand, these retail investors, who typically invest in equities, collective funds and fixed-income products, have been contending with volatile stock markets, sluggish interest rates and uncertain yields. At the same time, many have witnessed the performance in alternatives such as private equity, venture capital, real estate, private credit, digital assets and the like, and have been looking for opportunities in those classes in order to realise higher returns. 

On the other hand, alternative investment fund managers (AIFMs) have been faced with reduced inflows from limited partners (LPs) who might typically have invested in their new ventures. As a result, they have started to look more towards new and potentially untapped markets, including private, retail investors. 

At a basic level, the opening up of alternatives to retail investors would seem to be a simple case of matching supply and demand. However, these dynamics never exist in a vacuum, and this landscape has been helped by the development of fintech platforms enabling non-institutional investors to access alternatives, and asset tokenisation, which allows for fractional ownership of assets across a wider investor base.

Critically, it has also been facilitated by important developments in the regulatory landscape.

Opening up the market

Indeed, while all of the above creates a dynamic picture around the ‘democratisation’ or ‘retailisation’ of the alternatives market, it would be very difficult for general partners (GPs) and investors to move forward if it wasn’t for advances in what is a highly regulated industry.

Regulators have clearly been listening to interested parties and have, in many instances, amended existing legislation to make alternatives more accessible, while still ensuring investor protections.

In some cases, the changes have been targeted towards specific types of alternative investment funds (AIFs). For example, in 2021, an amendment to Germany's KAGB introduced open-ended infrastructure AIFs as a way for retail investors to access infrastructure investments starting from a minimum of €25. 

Some changes have been rather more subtle. In 2023, Luxembourg revised its funds regime to reduce the required minimum for a ‘well‑informed investor’ from €125,000 to €100,000 across a specific set of funds vehicles, namely SICARs, SIFs and RAIFs. Albeit that this likely excludes the average retail investor.

Certainly, the most significant has been reform of the European Long-Term Investment Fund (ELTIF) regime in the EU, and the introduction in 2024 of what is commonly known as ELTIF 2.0. While introducing a host of amendments to the previous rules – such as more diversified fund structures and no minimum investment requirement – the key change, in the context of democratisation, is that funds can now be structured as closed-ended, semi-open-ended and open-ended, offering flexible redemption and lock-up terms, making them ideal for the retail market.

The Alternative Investment Management Association (AIMA) believes that changes to the ELTIF framework could result in an additional €100bn in alternative assets funding over a five-year period.

A similar regime in the UK – the Long-Term Asset Fund (LTAF) – also makes alternative asset classes available to retail investors as well as pension schemes. While LTAFs haven’t yet seen the same widespread adoption as ELTIFs, they are slowly gaining traction.

Challenges for fund managers

ELTIFs and LTAFs are a clear step forward in making the alternatives market more accessible to a wider audience. For retail investors they can increase portfolio diversification as well as delivering the potential for higher returns, although this usually comes with a higher risk profile. For GPs on the other hand, they open up a potentially brand-new pool of investment capital.

However, with that new market comes a whole host of challenges, many of which will be particularly difficult for managers entering the retail space for the very first time. We highlight some of them here.

A higher regulatory burden. Alternatives managers will already be familiar with a swathe of rules and regulations, such as the Alternative Investment Fund Managers Directive (AIFMD). However, they will face additional compliance around retail marketing and investor protection rules, such as MiFID II and the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation among others. This will need navigating carefully.

Managing liquidity. Retail investors expect higher liquidity, even in funds investing in illiquid assets. This could be a steep learning curve for managers who may need to implement redemption restrictions, notice periods or secondary liquidity mechanisms to balance investor needs and asset profiles.

Valuation and reporting. Retail investors require more frequent and user-friendly updates on performance, NAV and other reports, risks and the like. As a result, managers will need solid procedures allowing for frequent valuations as well as potentially having to invest in portals and educational content.

Complex, costly onboarding. The retail space comes with stricter KYC/AML rules, suitability assessments and disclosure requirements. What’s more, whereas a typical private equity fund, for example, might have fewer LPs with higher tickets, the reverse will be true here – there will be higher customer service costs per investor due to the smaller ticket size. All of this creates a significant administrative burden and will require robust IT infrastructure for digital onboarding, account access and secure communication.

Working with new outsourced providers. It’s likely that when using ELTIFs and LTAFs, that managers will need to work with external third parties. This could include transfer agents, who can facilitate larger volumes of investors, transactions and requests, and depositaries capable of servicing retail-style funds. 

Methods of distribution. AIFMs generally aren’t used to accessing the retail market, so distribution may be a particular challenge. This may require tapping into a network of distributors, or finding ways to access retail investors directly, such as through tokenisation.

Possible action points

It’s clear that for many managers, a brand-new mindset might be required if they’re to effectively make alternative assets more accessible to retail investors. In order to address the challenges above, they might want to consider the following points.

• Invest in technology infrastructure. This is not only vital in terms of operational efficiency, but also to meet the expectations of retail investors. Managers should consider using existing platforms or developing proprietary applications to streamline investment processes, efficiently reach retail investors and enhance distribution capabilities. It’s the classic ‘buy versus build’ conundrum.
• Prioritise data analytics. Establish centralised data hubs and employ AI-driven analytics to improve transparency and optimize portfolio management. Real-time data analytics enhance investor confidence by providing transparent and timely insights.
• Enhance investor education. As much as the retail market may be new to many managers, the alternatives space will be new to retail investors, and there is a demystification that needs to be done. Managers should consider webinars, interactive content, regulatory guidelines and the like to bridge knowledge gaps – ensuring investors understand the benefits and risks of alternatives.
• Strategic portfolio allocation. Even though retail investors entering the alternatives space are willing to accept more risk, that doesn’t mean they will accept as much risk as institutional investors. Managers may need to adopt cautious strategies, recommending that retail investors allocate between 5%-15% of their portfolios to alternative assets, managing risk effectively while benefiting from potential returns.

• Due diligence. Working with new third parties can be a leap of faith, and managers will need to make sure they undertake all due diligence on external providers – including ensuring they have the relevant track record and meet all the required standards.

   

What comes next?

The global investment landscape is constantly evolving and the desire for retail investors to access alternatives is just part of that evolution. The coming together of technology, regulation and GP/investor expectations has created an environment that could see a lot of action in the years ahead.

The very latest figures, as shown in the chart below, indicate an acceleration in the establishment of ELTIFs across Europe, but the market is still in its infancy.

Eltif registrations by jurisdiction

European Long-Term Investment Funds recorded on EU registry

Growing innovation in fintech platforms, pilots of tokenisation in certain European countries and an openness of the regulatory authorities for easier onboarding and streamlined documentation may all play a key role in making alternatives a regular investment option for retail investors in the years to come. 

As alternatives become more accessible to retail investors, managers face new pressures around compliance, reporting, liquidity, and investor onboarding. At Vistra, we provide the regulatory expertise, fund administration, and technology infrastructure to help you meet these demands with confidence. Find out more about our fund solutions here.

Diana Dumitru

Commercial Product, Private Equity, EU&ME