The Democratisation of Alternative Investments

The arcane and mysterious world of private equity and venture capital investments, known in the United States collectively as “alternative investments” have long been the realm exclusively of institutional investors (pension funds and other large organisations) and high-net-worth individuals. But recent years have seen the significant democratisation of these investments and a dramatic increase in participation among “retail” or “mainstream” investors.

According to the 2024 Russell Investments survey, as a percentage of fund managers’ total assets, institutional investors accounted for 85% of assets under management for alternative investments in the US while retail accounted for 15%. Relative to last year’s survey this represented a 5% increase in assets sourced from the retail channel. Going forward, 83% of managers said they are actively looking to raise more capital from individual investors and 90% of respondents highlighted their plans to expand their offerings to this cohort in the next 12-24 months.

Benefits of Alternatives


Investing in private equity and venture capital funds offers investors several advantages. These funds typically aim for higher returns than traditional equity markets, compensating for the longer capital commitment time and higher risk associated with investing in private or early-stage companies. They also provide access to sectors and businesses not available through public markets, allowing investors to diversify their portfolios beyond publicly traded stocks and bonds. Furthermore, these investments offer the potential for significant influence and control over portfolio companies, enabling proactive measures to drive growth and profitability. Private equity and venture capital funds often use sophisticated strategies and leverage industry expertise to identify and unlock value in undervalued or growth-oriented companies, potentially leading to outsized returns for investors. The long-term nature of these investments also offers the potential for performance and stability during volatility in public markets.

The growth in retail participation in private equity and venture capital funds has been facilitated by changes in regulation, a growing awareness of the benefits and availability of alternative investments and several new technologies.

Regulatory Enablement

Regulatory changes in the United States have significantly increased the ability of retail investors to invest in private equity and venture capital funds. Key among these changes has been the Securities and Exchange Commission’s (SEC) amendment of the definition of an “accredited” investor. Accreditation is required as an indication of the investor sophistication necessary to invest in many alternative investments. New SEC rules expanded eligibility criteria beyond mere income and net worth thresholds to include individuals with certain professional certifications, designations or credentials, and knowledgeable employees of private funds. The SEC has also proposed rules to allow greater retail participation in private markets through registered funds, such as interval funds and non-traded business development companies (BDCs), which can invest a portion of their assets in private equity and venture capital.

These regulatory adjustments have made it easier for retail investors to access investments that were traditionally reserved for high-net-worth individuals and institutional investors. The number of accredited investors swelled to 24 million in 2022, according to the SEC. That is 8 million more than in 2019, and the number is poised to keep growing. Funds structured under new rules like Regulation D 506c, Regulation A+ and Regulation CF for crowdfunding open alternative investment funds to non-accredited investors.

Awareness

Retail investors have become increasingly aware of the option to invest in private equity and venture capital funds through various channels. The proliferation of digital media and financial education platforms has played a significant role, offering insights into alternative investment strategies and highlighting the potential for higher returns compared to traditional markets. Financial influencers and industry thought leaders on social media also contribute to raising awareness by discussing the benefits and risks associated with these investments.

There is a also growing community of trade organisations where established and aspiring fund managers, financial advisors, investors and service providers have increased investor awareness of a maturing alternative investment market. Some of these organisations include the National Venture Capital Association (NVCA) in the United States, which focuses on the venture capital community. The American Investment Council (AIC), focusing on private equity, the Alternative Investment Management Association (AIMA), the Alternative and Direct Investment Securities Association (ADISA) and the Institute for Portfolio Alternatives (IPA).

These organisations actively support environments conducive to attracting retail investments into private equity and venture capital through regulatory advocacy and educational initiatives.

New Technologies

Some fintech platforms and online brokerages have lowered entry barriers, enabling retail investors to access alternative investment markets with smaller traditionally high investment amounts. These platforms aggregate capital from multiple investors, making it possible to participate in investments that were previously out of reach due to high minimum investment requirements.

Blockchain technology has also played a role, particularly through the issuance of security tokens representing ownership in private companies. This innovation offers a more efficient, transparent, and accessible way for retail investors to gain exposure to private equity and venture capital.

Crowdfunding platforms have further democratized access to venture capital investments, allowing startups to raise funds directly from retail investors under regulated frameworks. These platforms not only provide capital to emerging companies but also allow investors to diversify their portfolios by including early-stage investments.

There has also been the growing adoption of alternative investments by financial advisors and technologies to facility their recommendations of private equity and venture capital funds to accredited investor clients.

Fund administration and back-office technology for fund managers has also advanced. With private funds, which were previously limited to a very few large scale investors, now accessing capital from hundreds or thousands of retail investors, solutions for managing investor relations, payments and compliance at scale have become essential.

The Road Ahead

Market intelligence firm Preqin’s Future of Alternatives 2025 survey predicts assets under management (AUM) growth in alternative investments to average 9.8% per year through 2025. A record 81% of investors said they expect to increase allocations to alternatives in the next five years. With a growing population of eligible, aware and empowered retail investors, the mainstream investor market will be a major part of this trend.