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In recent years, the landscape of private asset investment has evolved significantly, presenting new opportunities and challenges for retail investors. As market dynamics shift and regulatory frameworks adapt, the question arises: can and should firms develop private asset products for retail investors?

This article explores the current market conditions, regulatory developments and opportunities, and the importance of strategic product structuring in this context.

The private assets market has experienced notable growth and undergone changes, influenced by global economic shifts and policy adjustments.

In the opening article of this series ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK explored the dramatic growth of the private assets industry and the shift for corporates away from public markets towards private equity and private credit finance.

More recently, the impact of US tariffs has been a significant factor affecting private market investors. These tariffs have introduced new complexities, which are expected to influence investment strategies, asset allocations and valuations. As global trade dynamics continue to evolve, investors are navigating a landscape marked by both opportunities and the uncertainties of inflationary pressures, interest rate fluctuations and risk factors which can impact the performance of private assets.

Despite these challenges, private markets will likely remain attractive over the longer term due to their potential for higher returns compared to traditional public markets. Investors are increasingly seeking diversification and exposure to alternative assets, driving demand for innovative investment products. The UK government and workplace pension providers are setting new voluntary targets in the Mansion House Accord to invest in private assets to boost the UK real economy. The pace of change in private markets is fuelling investment opportunities to serve this appetite, from the development of new private businesses to satisfying demands for improved infrastructure.

In response to growing interest in private assets, authorities around the world have been working to create a more conducive environment for retail investors (as explored in chapter seven of ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø member firms' global regulatory round-up here).

Across Europe, this has manifested itself in the creation of regulatory regimes such as the Long-Term Asset Fund (LTAF) in the UK, and improvements to the European Long-Term Investment Fund (ELTIF) in the EU. These regimes have been designed specifically for pension and retail investors to invest into less liquid assets.

Beyond these regimes, managers have continued to develop products using existing frameworks such as the Luxembourg UCI Part II law which can be sold to a broad investor base. Examples of such products include access platforms to distribute private strategies to wealth clients, and open-ended evergreen funds to acquire secondary private equity fund interests.

These dynamics have driven new opportunities for retail investors to access private assets that go beyond the traditionally available listed investment trust vehicle � described below.

There is a spectrum of UK-authorised fund regimes which provide for varying flexibility in investment strategies and distribution possibilities of private assets to retail investors.

Moving through the range of available authorised vehicles, from UCITS, NURS (Non-UCITS Retail Scheme), QIS (Qualified Investor Schemes) to LTAFs, there is an opposing tension between the openness of distribution opportunities and the investments the vehicle may invest in.

The Financial Conduct Authority (FCA) the open-ended LTAF vehicle in 2021 and distribution possibilities for LTAFs in 2023. More recently, it has taken significant steps to evolve the NURS regime (covered below).

As managers become more familiar with the LTAF vehicle, fund launches have accelerated. 10 UK firms have now launched LTAFs � primarily targeted at defined contribution pension schemes � but there are signs that more managers are considering bringing retail or ‘wealth� focused LTAFs to market.

More generally, there is a trend in the UK and the EU of accelerating launches of LTAFs and ELTIFs respectively (the latter having been triggered by the EU’s reforms to the ELTIF Regulation). And ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK’s latest risk and ICARA benchmarking found that 56% of firms who are launching new private asset funds expect to launch funds using either an LTAF or an ELTIF structure. 

There are also new opportunities for NURS funds. As a starting point, within certain guardrails, NURS funds can invest up to 20% of their assets in any combination of holdings in LTAFs, QIS, unregulated schemes and unapproved securities.

Up until the end of 2024, the FCA’s COLL rules had restricted NURS funds from investing in underlying funds if the underlying fund invests more than 15% of its assets in other funds. This restriction aimed to prevent circular investments between funds by imposing a percentage threshold limit on both funds.

However, following changes by the FCA in Handbook Notice 125, NURS may now invest in LTAFs if the LTAF invests more than 15% of its assets in units of other funds, putting LTAFs in a favourable position compared to other private asset funds (see explanatory diagram below). 

Whilst this change broadens the investment universe for a NURS fund, the manager will still need to ensure that it can meet its obligations to investors to enable redemptions, provide adequate liquidity, and manage potential mismatches in valuation (e.g. around valuation frequency).

Beyond traditional NURS, the NURS FAIF (Fund of Alternative Investment Funds) vehicle allows for more flexible fund-of-fund investment opportunities and is not subject to the 20% limit on investing in LTAFs described above. 

As the policy landscape becomes more accommodating, the importance of strategic product structuring cannot be overstated.

Developing private asset products for retail investors requires a nuanced approach to liquidity management (including redemption arrangements), valuation, distribution opportunities and tax efficiency:

• Liquidity management is crucial, as retail investors typically expect a certain level of access to their investments. Structuring products with appropriate liquidity provisions makes it more likely that redemption requests can be met without compromising the fund's stability or harming investors. This may involve incorporating mechanisms such as redemption gates or notice periods to balance investor needs with the fund's long-term investment strategy.
• Valuation policies, procedures, methodologies and governance have an important role to play. This is especially relevant where retail vehicles invest in underlying products that have differing valuation frequences (for example, a NURS investing in an LTAF). More generally, valuation is a topic of supervisory scrutiny with lessons to be learned, as explored in this recent article here.
• Distribution opportunities require careful consideration as these will dictate whether the target investor base can be reached and any barriers that may exist. Whilst the LTAF is subject to specific restrictions as a Restricted Mass Market Investment (RMMI), NURS may be more freely distributed, but would be subject to an appropriateness test, if deemed to be ‘complexâ€�.
• Conduct risk and the Consumer Duty: Throughout the end-to-end manufacturing and distribution lifecycle, managers need to identify and address potential conduct risk â€� particularly in the context of the identified target market and distributor oversight. This is especially important for firms that are used to dealing with institutional investors. In the UK, firms offering retail products need to comply with the Consumer Duty’s four outcomes and cross-cutting rules.
• Tax considerations also play a pivotal role in product structuring. Efficient structuring of the fund can make the product more attractive where there is neutrality between direct investments and investments through a fund vehicle, i.e. investors should pay tax on investment returns as if they held the underlying investments directly. However, achieving this often involves navigating and solving the puzzle of tax regulations associated with the different investor, fund and investment jurisdictions. For UK funds, holding a mixed portfolio of equity and debt investments can result in tax being due at the level of the fund.

The current market conditions, coupled with favourable regulatory developments, present an interesting case for developing private asset products for retail investors where success requires thoughtful product structuring.

As the private asset market continues to evolve, financial institutions have a unique opportunity to innovate and meet the demand for alternative investment solutions among retail investors.

You can read more in ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK’s series of articles, where we explore wider regulatory trends and developments impacting the private assets industry.