Democratisation of Private Markets: meaning and impact on the system

Over the past few years, access to investments in private markets has transformed significantly, leading to the growth of what is referred to as the "democratisation" of private markets. This shift reflects an evolution toward a more inclusive and open system, aiming to make investment opportunities historically reserved for large institutional investors or those with substantial capital more widely accessible. Thanks to technological and regulatory innovations, today even private investors can participate in these markets, contributing to a substantial transformation of the entire financial ecosystem.

While high interest rates in 2023 posed challenges for sectors like real estate and led to a decline in global fundraising for private markets—according to the McKinsey Global Private Markets Review report released last March —2024 began with more promising prospects. Concrete actions, such as interest rate reductions, have been encouraging investment in this sector.

PRIVATE MARKETS: A DEFINITION

Let’s start with a definition: private markets include all financial instruments that are not publicly traded, offering investors a diverse array of alternative strategies and solutions. Although they still represent a smaller portion of total investments compared to public assets, interest in private markets is growing rapidly. Investments in private markets contribute to portfolio diversification, and due to their less liquid nature, help to stabilise returns over time, often offering higher potential returns than traditional asset classes, especially in the long term.

Historically, private markets have been dominated by financial institutions, pension funds, and other large investors. As discussed during YELDO's recent Networking Event, about 90-95% of total investments in private markets come from institutional players, leaving only a small fraction—between 5% and 10%—to private investors. This dynamic has persisted for decades due to high entry thresholds and complex regulations that limited access for smaller investors, who were considered less sophisticated and therefore less protected from financial risks.

The concept of democratisation thus emerges in response to these barriers, with the goal of opening private markets to a broader and more diverse range of investors, from individuals to small private funds. Democratisation aims to level the playing field, also allowing private investors to enter markets that offer significant opportunities for returns, albeit accompanied by a high-risk profile.

KEY DRIVERS OF PRIVATE MARKETS EVOLUTION

This phenomenon has been largely driven by the evolution of fintech and regtech, digital accessibility, and regulatory reforms aimed at lowering barriers to private investments.

Looking in detail, the first key factor is technological innovation. Through digital investment platforms, users can access, monitor, and manage their investments easily and transparently. In recent years, fintech has made it possible for specialised portals to emerge, which bridge the gap between private investors and opportunities in private markets, reducing the need for high capital requirements and simplifying the investment process.

Alongside technological advances, important regulatory changes have been introduced. In Europe, for example, the creation of Eltif (European Long-Term Investment Funds) and their recent evolution into Eltif 2.0, designed to promote retail investor inclusion, mark a significant step forward. These funds, along with similar structures such as REITs (Real Estate Investment Trusts), enable investments in private assets like real estate or infrastructure in ways similar to public funds, creating a regulatory framework that facilitates participation by a broader range of investors.

BENEFITS AND OPPORTUNITIES

The democratisation of private markets has the potential to generate benefits and opportunities not only for investors directly involved in specific deals but for the economic system as a whole. Here we explore three major financial and social advantages.

Portfolio diversification

Access to private markets allows investors to diversify their portfolios with assets uncorrelated to public markets, reducing volatility and improving differentiation. In a context of public market instability, the ability to invest in private assets, such as real estate or startups, can enhance overall portfolio stability.

Potential for higher returns

Despite the higher risk profile, private market investments can offer superior returns compared to public markets, especially for investors willing to lock in their capital over longer periods. Recent studies show that private equity and venture capital have seen significant growth in recent years, with average annualised returns exceeding 10-12% compared to traditional public markets. According to an analysis by Preqin, global private equity has achieved a 5-7% annual growth in assets under management over the past five years.

Economic and social impact

Last but not least, the democratisation of private markets can have positive economic and social impacts. Widespread access to these markets can drive growth for small and medium-sized enterprises, creating development opportunities for the real economy. In practice, this can create a “bridge” between private savings and the real economy, unlocking the wealth held by savers and private investors and channelling it to thousands of SMEs, which form the economic backbone of Italy and Europe.

By including a greater number of investors, private markets can catalyse capital toward high-growth potential sectors such as technology, renewable energy, and sustainable real estate.