Is retail Capital Eroding Institutional Rights?

The story so far

Some corners of the asset management industry are banging the drum for greater access to private markets. They argue that retail investors have been excluded from superior risk-adjusted returns over decades, due to investment thresholds and regulatory barriers.

The fervour coincides with one of the toughest markets for fundraising. Adding capital from distribution channels on top of institutional commitments allows GPs to broaden their investor base and grow fee-earning AUM in the process. 

This evolution is in its infancy. Yet the early growth signals for evergreen funds suggests that retail investors are going to want in.  

As Pierre-Olivier Desplanches, Archinvest observes:

"Today we see very sophisticated, successful funds which could raise over 20 billion...still interested in diversifying their fundraising with private individuals. Even though they recognise that today it will be small, they are convinced that tomorrow it will be big."

On the horizon

This profound shift is forcing GPs to confront fundamental questions about structure, governance, liquidity and valuations with their core institutional investor base. This is whilst also educating a new investor base about semi-liquid funds.

Simon Jennings, HarbourVest Partners:

"[Democratisation] has this noble purpose of bringing private markets to everybody. But I don't think any of us really believe it should be everybody. It should be for the many. It should be for more, but it shouldn't be for everybody."

Markus Pimpl, Partners Group:

"There's a lot of talk about democratisation of private markets. But what does it really mean? It means that we need to have regulatory access. The regulator tells us who we can sell to and who's able to buy private markets products or not."

ILPA plans to launch a raft of new educational resources to assist members in their engagement with their GPs on the issue. They are concerned about weakening of LPA terms to make it easier to accept retail vehicles.

This echoes a sentiment that IPEM has picked up from our LP community. 

The risk to institutional LPs is that a retail vehicle could invest alongside their own capital whenever a GP launches an evergreen product; which could dramatically change the dynamics of the original investment decision. 

Concerns centre around several areas:

1. Incompatible returns expectations

Firstly, that the additional liquidity expected by retail investors risks dragging down performance. GPs must keep more cash in reserve to meet possible quarterly redemptions which effects deployment rates. LPs argue that this expectation is incompatible with the illiquid nature of the asset class, but that retail investors operate with lower return targets than institutional limited partners expect, creating potential conflicts of interest.

According to one institutional LP in our community:

"Retail investors often expect more liquidity than private equity can provide, creating a fundamental mismatch with the illiquid nature of the asset class. This isn't just a communication challenge—it's a structural incompatibility."

2. Erosion of governance standards

Secondly, the risk that governance standards are being weakened, to the detriment of the institutional LP.

When retail capital enters through separate products, LPs face much less visibility into how GPs manage these different pools of capital. Most concerning is that separate vehicles often operate under different fee structures with no mandatory disclosures by the GP about what's going on with the other product. These arrangements are frequently not documented in the LPA.

3. Competing fund economics

Finally, the effect on competitive dynamics.

According to another participant: 

"Evergreen structures compete with us for co-investment opportunities," potentially disadvantaging traditional institutional LPs. These retail-focused vehicles often want "all the money going in the ground on day one" and seek "secondaries and co-investments coming super fast," giving them operational advantages that can alter deal dynamics.

The bottom line

The concern is that retail investors lack the expertise to properly evaluate and monitor private equity investments. This opens the industry up to heightened reputational risks. Any "road accidents" which occur where retail investors have not been well-informed about these products could be very damaging. 

This debate is added to a growing list of questions about the future of private markets. As the industry evolves from an exclusively institutional asset class to a more democratised investment option, success will require approaches that recognise the legitimate needs of different investor types while preserving investment discipline and performance standards.

The stakes are high: get it right, and the industry unlocks new capital sources while creating value for diverse investors. Get it wrong, and private equity risks diluting its core investor base while exposing retail investors to poorly understood risks.

Takeaways

• Structural mismatches are real → Retail and institutional capital have fundamentally different liquidity and return expectations that create inherent conflicts in shared structures.

• LPs must understand consequences of parallel structures → The shift to separate vehicles creates challenges around transparency and governance that LPs need to be aware of.

• GPs must be prepared to engage → LPs will want reassurance about the level of investor protections as managers continue the push to manage two distinct pools of capital.