Private equity is (finally) making room for retail investors: PE firms are beginning to heed retail investors’ demands to be let in on private equity, as they look to diversify from stocks and bonds in what has been the worst year for markets in years. Historically walled off from retail traders by difficult accreditation requirements and large ticket sizes, some PE firms are now moving to open up their portfolios to individuals. Meanwhile, a slate of startups have popped up looking to democratize the industry and facilitate retail investments.

By the numbers: So-called “alternative” assets, such as real estate, private equity, and credit account for 30-50% of institutions’ investments, according to a Mckinsey study. On the other hand, the average retail investor has just 2% in alternatives. While it’s mostly unorthodox, some asset managers — including Schroders, Abrdn, Jupiter and Baillie Gifford — provide some form of access for individuals, though it has still been limited.

What’s changed? PE firms are adjusting to a world of more diversified investments. Most institutions set limits on how much they will invest in alternatives, and most have already maxed out, the Financial Times writes. Meanwhile, individual investors are increasingly looking to diversify their investments as old-school market trends die out — the traditional 60/40 portfolio mix of stocks and fixed income is feeling increasingly passé, said Matt Brown, founder and CEO of CAIS, a marketplace for alternatives investments. and especially as market volatility becomes the new norm. With new market trends now seeing most institutions’ investments heading towards these “alternative” investments, “any wealth adviser not using alternatives in the next few years will be at risk of not having a practice,” he added.

Experts think PE for retail investors will boom over the next decade: “In five or 10 years private equity will be for most people as common and as accessible as public markets,” Steffen Pauls, founder of retail-focused PE investment platform Moonfare, estimates in a separate interview with the FT. Mckinsey also sees retailers doubling their PE investments to 5% of their portfolio in the next three years, injecting some USD 500 bn to USD 1.3 tn in new capital to the asset class.

Wealth management departments at large financial institutions are shifting their focus to PE: Most large financial institutions are reaching individuals through wealth management, a business that combines asset management with financial planning and advice. “There is a tremendous transfer of capital under way out of the traditional wealth management industry into alternative investments,” Brown says. PE pioneer KKR is expecting some 30-50% of its incoming capital to come from wealthy individuals over the coming period, the FT reports.

Over in startup land, fintechs looking to democratize the industry are booming: Berlin-based Moonfare has some USD 150 mn in assets under management in the US, while US-based startup Allocations — which is valued at around USD 150 mn — similarly allows retail investors to make PE investments. The two companies are working to attract retail investors to the asset class by making it more accessible and reducing the minimum investment amount required for investors to get in on a PE investment. “Traditionally, retail investors, if they go to their bank, their minimum to invest [in alternative assets] is really high, like USD 5k to a mn USD, but on Allocations, you can have any minimum,” Allocations CEO and founder Kingsley Advani said.

Traditional PE firms are also beginning to accept smaller ticket sizes: KKR last month decided to tokenize part of one of its funds, helping it streamline administration processes and allowing it to accept smaller checks from investors. Administrative processes often prove costly for asset managers, which is part of the reason why they tend to prefer bigger checks — and ask for bigger fees — to compensate. These ticket sizes would traditionally be in the mns, but providers are beginning to bring that number down to USD 50k or lower, according to the Financial Times.

Time spend is another factor: Institutions and very high net-worth individuals can afford to lock up mns of USDs for years in the asset class, which not only comes with hefty fees but is also often illiquid for years.

But new solutions are emerging to make investing in PE more accessible, the FT says. Some are now offering “semi-liquid” funds, which act like mutual funds but limit the amount investors can withdraw in a given period, giving investors some flexibility but still imposing limits on how much money they can make in the near term from the asset. Investment trusts, which are used to hold PE investments, are also increasingly being used in the UK in a bid to integrate PE investments into other investments as part of one vehicle, eliminating the need for a minimum ticket size and allowing investors to publicly trade their shares on the market and reap more short-term rewards from PE investments. An even more attractive and accessible option for investors is pooling resources with other investors to invest directly in PE transactions.