Private equity and the enormous amounts of accredited investor money left on the table

When I think about key changes to PE, some changes are obvious at first glance. An example is the inclusion of accredited investors into private equity investments. The Investment Company Act of 1940 puts in place a number of regulations that essentially exclude those without >$5M in assets from investing into private equity. Some of the concerns of course are the illiquidity of PE investments and given there’s less reporting and regulation, rules have been put in place to limit access to many. It’s 2022.

Private equity over the last 10 years has returns above the public stock indexes and would provide more diversification for retail investors which would be (as my quant finance boyfriend would tell you)strictly better for their portfolios. Given firms charge 2% management fees, investors won’t turn this new money away, either. Given it isn’t too much additional work for them, more money = better. In the past, collecting $100k checks even wasn’t worth it for established private equity firms due in part to a “look through rule” — too many “non-accredited” checks means your fund will have to register with the SEC. Big time and money sink.

Now, there are companies like CAIS and iCapital that enable faster generation of docs and distribution to high net worth individuals, as examples of how the space has already begun the seeds of its transformation. In conclusion: the private equity markets will almost certainly see an influx of retail money.

If you want to read about a less obvious change to the private equity industry check out my post here: The private equity data playbook of the future.