3 Thoughts on Retail Advisors & Private Equity for 2H

The private equity market is experiencing a significant shift towards retailization, driven by the SEC's removal of the 15% limit on private funds in closed-end funds, which is projected to expand U.S. retail allocations from $80 billion to $2.4 trillion via vehicles like ETFs and interval funds. While private equity AUM declined in 2024 and holding periods extended due to high interest rates impacting valuations, deal volume recovered 22% to $1.7 trillion. The sector anticipates a potential rebound if rates ease, as retail investors seek alternatives to lower public market returns and the market adjusts to current conditions.

Analysis

The private equity landscape is undergoing a significant structural shift towards retailization, catalyzed by a recent SEC rule change removing the 15% limit on private funds within closed-end funds. This regulatory easing coincides with a period of investor demand for alternatives, as the S&P 500's 7.7% year-to-date return trails the previous year's 25% gain. This confluence of factors is projected by Deloitte to expand U.S. retail allocations in private markets from $80 billion to $2.4 trillion. Despite this optimistic outlook on capital flows, the sector faces headwinds from the current macroeconomic environment. Private equity AUM experienced a decline in 2024 after nearly two decades of growth, and investment holding periods have extended by almost a full year. According to S&P Global analysis, this slowdown is primarily due to high interest rates creating a valuation gap between buyers and sellers. However, there are signs of recovery, with global deal volume rising 22% to $1.7 trillion between 2023 and 2024. The sector's rebound is contingent on interest rates potentially easing, which could reactivate deal-making. The proliferation of accessible investment vehicles, including ETFs like Invesco's PSP and new public-private funds from managers such as KKR and Capital Group, provides new entry points for a broader investor base. Furthermore, a market reset, potentially triggered by funds selling legacy assets at a loss to adjust to the higher rate environment, could present a compelling entry point for new capital.

Key Decisions for Investors

• Investors with long-term horizons should consider initiating or increasing allocations to private equity through newly accessible vehicles like ETFs and interval funds to gain alternative exposure, particularly given the underperformance of public equities.
• Closely monitor interest rate trends and central bank commentary, as a potential easing of rates in the second half of the year would be a significant catalyst for improved private equity deal flow and valuations.
• Watch for signs of a market reset, such as an uptick in secondary market sales or fund liquidations even at a discount, as this could signal that valuation expectations have normalized and present a strategic entry point.
• Evaluate specific listed private equity vehicles, such as the Invesco Global Listed Private Equity ETF (PSP) or offerings from firms like KKR, as practical ways to gain diversified exposure to this evolving asset class.