The author, Steffen Pauls, is founder and co-CEO of Moonfare, a digital private markets manager.
As Singapore takes decisive steps to open private markets to retail investors, we stand at a pivotal moment for investment democratisation in the region.
The Monetary Authority of Singapore (MAS) has consistently positioned itself at the forefront of financial innovation. Having already advanced blockchain adoption—a technology which has the potential to address the liquidity challenges of private markets—it is now among the first to create structured pathways for retail participation in private equity and venture capital via direct Long-term Investment Funds and the fund of funds-structured Long-term Investment Funds of Funds (LIFS and LIFFs).
The move is a welcome recognition that financial inclusion extends beyond access to banking services to addressing unequal access to investments themselves.
Financial inclusion extends beyond access to banking services to addressing unequal access to investments themselves.
Individual investors have so far been largely locked out of private markets. In this two-tier investment landscape, retail investors have largely been limited to savings and public markets, while institutional investors and the ultra-wealthy have enjoyed access to higher-returning private investments—assets that have consistently outperformed other asset classes and public equity, particularly during economic downturns.
This disparity in investment access only exacerbates the growing global wealth inequality.
Selection critical
While private equity has historically delivered strong returns, the stark disparity between the industry’s top and bottom performers represents a risk for investors without access to in-house investment departments.
Pitchbook data, for example, shows top-quartile funds of the 2023 ‘vintage year’ (when a fund first calls capital from investors) returning on average just under +20% performance, while bottom-quartile fund performance was a sobering -14%.
In other words, successful investing in private markets requires selectivity. You will only find real outperformance if you have the expertise to identify and access funds that have outperformed the average private equity market over a long period of time.
Successful investing in private markets requires selectivity.
If, in seeking the outperformance that pension and sovereign wealth funds achieve, retail investors instead access bottom-quartile funds we risk a mis-selling scandal like the payment protection insurance (PPI) disaster of the 1990s or the UK pension mis-selling of the late 80s. Those historical scandals damaged public trust and collectively cost the financial industry billions in compensation. It must not happen on our watch.
So, how do we safely open private markets to the ‘mom-and-pop’ investor?
Investment platforms and fund managers must ensure that reform is carried out in the interests of our end customers. We need to actively work with regulators as they develop their framework—our industry possesses unique insights into operational realities that can help create a set of protective and practical regulations.
And we must deliver and explain products that genuinely serve retail investors’ interests, rather than simply capturing a new market segment. Crucially, those who stand between the individual investor and the private equity ‘jungle’ must be able to offer their investors institutional-quality investments. Our teams should be deeply rooted in the private equity industry, rather than existing simply to provide digital access. They should have access to the world’s best-performing managers, and a due diligence process to rival the best in-house investment departments.
Providing ongoing, transparent, and accessible education is also a critical responsibility. We must help investors understand the long-term nature of private investments, as well as the structure of capital calls and the ‘J-curve’ effect of traditional private equity structures. We must teach people about the distinctive characteristics of different private market strategies, how they behave in different market circumstances, and the risks and rewards associated with each.
We need to educate individual investors about constraints on liquidity. Often, people hear ‘liquid’ but not ‘semi’ when semi-liquid strategies are discussed. They may not understand the likelihood of coming across limits on withdrawals (‘gating’) if everybody wants to get out at the same time, as in a downturn they often do.
Singapore’s initiative represents an opportunity to redefine who benefits from private market investments. By approaching this opportunity with enthusiasm and a deep sense of responsibility, we can ensure private markets deliver on their promise of better investments for all.
