How private markets can scale up to embrace retailization

The inevitability of retailization

This is not just a matter of technological enablement, although innovation has its role.

Prevailing market conditions, not new capabilities, drive the retailization trend.

Half of new capital inflows into private markets now comes from individuals, according to Blue Owl Capital, a participant in Juniper Square’s Series D. That $7.4 trillion pipeline from high-net-worth individuals exceeds that coming from insurance companies – and even exceeds that coming from pensions and sovereign wealth funds combined. This is why institutional investors considered Juniper Square to be a solid bet. The retailization shift appears to be a broad, deep, long-lasting secular shift.

To some degree, this may be because the number of wealthy people is growing, according to Capgemini, with the population gain concentrated in North America. That does not necessarily mean that they would choose to invest increasingly in private markets. The comparably low returns to be had from trading in public securities, though, is making private investment ever more attractive. From there, Moody’s draws the line to how this impacts firms that operate in these markets.

“Private markets are becoming increasingly important to the expansion of global capital markets, in particular, as public listings fall and more companies opt to delist or remain private,” Moody’s reports. “To facilitate growth, asset managers and their partners are innovating new structures to provide points of access for private wealth. ‘Main Street’ investors are becoming more important as institutional investors bump against capacity constraints in their alternative investment allocations.”

Bain & Co. confirms that asset managers see in retail investors a “vast, untapped market [which] has become increasingly attractive”.

While this demonstrates the need for a scalable, private markets-focused platform that comprises onboarding, investor management, and fund administration functions, it still does not fully explain why Juniper Square is attracting investors’ attention now. It has a legion of competitors. To understand its appeal, one needs to understand how it plans to deploy that newfound funding.

Juniper Square announced it will use the capital to accelerate investment in JunieAI, an artificial intelligence instance built specifically for the needs of private markets. JunieAI combines the power of modern large language models with enabling components for both general partners and limited partners. While Juniper Square’s pedigree is in real estate, the application of a scaled data model, comprehensive workflows, integrations, and robust measures for security, control, and permissioning are applicable throughout the private markets. The intended result is to help GPs move faster, work smarter, and operate more efficiently.

“As data volumes continue to grow, the availability of more efficient and scalable solutions becomes increasingly critical. Emerging technologies such as GenAI and LLMs offer significant potential to transform unstructured textual information into actionable data at scale,” according to a post on the State Street website. “As these technologies continue to evolve, they can not only help meet the rising demand, but also empower better-informed decision-making across the private markets landscape, paving the way for a more agile and data-driven future.”

For private markets GPs and fund administrators, this means that future success could hinge on having a well-optimized suite of data and infrastructure tools.

Potential impact on markets and their participants

A recent Private Funds CFO article sees a number of operational implications for adopting investment software focused on private markets. The first and most important is, of course, scalability.

“Private equity GPs going after private wealth and retail investors are suddenly working with hundreds or thousands of LPs,” Jennifer Banzaca writes for Private Funds CFO. “That’s a massive shift, and it puts a huge strain on operations because most private equity firms aren’t built to handle that kind of scale.”

Still, that is hardly the only benefit of preparing for the retailization of private markets. Reporting – and, more to the point, the processes leading up to it – is a critical consideration.

“When firms try to brute-force connections between outdated systems and service providers, they only increase risk, waste time, frustrate stakeholders, limit visibility and create operational headaches,” Banzaca continues. In an interview with Juniper’s CEO, she reports his view that T+45 valuations are no longer sufficient and that investors have come to demand T+5.

The real bottleneck for retailization readiness, though, is onboarding, due to its impact on regulatory compliance. KYC, AML, and related datasets must all be verified with the same care for every potential client, regardless of how many clients a firm might have. Manual systems simply will no longer do in the face of retailization.

Banzaca is skeptical that any single tech platform can solve all these operational problems, so orchestrating them becomes the challenge.

Preparing for retailization is a valid strategic goal, but it can only be achieved by planning the transition carefully, then implementing the project plan using the highest professional standards.

Only then can a GP or asset manager claim success. Success, however, is a term that can be hard to define.

What success looks like

Readiness for retailization is an observable result. In fact, it is a set of results that provide concrete benefits throughout an alternative asset manager’s infrastructure. A successful transformation provides obvious improvements in data management, IT infrastructure and operational processes.

Data management

At the database level, a firm should see improved data quality and accessibility. Metrics for accuracy, completeness consistency, validity, timeliness, and uniqueness should all show improvements against a baseline. Further, data security should be enhanced; unauthorized access should decline, and ongoing risk assessments and security audits should report more favorable findings. With these improvements in hand, managers should have every right to expect better financial returns as a result of enhanced data analysis. This is also where AI comes into play; it can read financial statements and memoranda, thus automating workflows that were once manual, slow, and error-prone.

Infrastructure

Meanwhile, their IT infrastructure should become more efficient and flexible as it shifts from on-site hardware to cloud-native services. While this move in itself gives firms greater control over IT spending, that is not the only advantage.

Cloud-native applications simply integrate better with other cloud-native applications, and that is the direction the entire industry – and the entire business world – is moving. It is unlikely that a firm would completely abandon current, installed architecture for the sole purpose of preparing for retailization, but this does provide some strategic cover for the ongoing program of moving to the cloud.

Process

Ultimately, though, the surest way to know that the efforts to accommodate this shift in the market are working is that you yourself notice. If workflows are streamlined or even fully automated, it means that the burden of manual processing has been removed from you. Efficiency, agility, fewer security breaches, fewer emails from regulators, and other perhaps unexpected benefits will accrue if the transition has been done properly.

Part of that transition, though, is change management. This might involve a bit of handholding at first, a bit more attention to both clients and internal end users. Training, support, and the often overlooked skill of managing resistance to change are all elements of any technological – or for that matter, organizational – change.

Plotting the course

The need to prepare for the retailization of private markets is urgent, driven by three incontrovertible facts.

• First, as we discussed here at some length, retailization is a real trend that is unlikely to reverse anytime soon. 
• Second is that the private capital markets are flush. Roughly $3.9 trillion in dry powder – a record sum – sits untouched in clients’ accounts, according to the Leading Point consultancy. 
• The third fact follows from the second: Investors are growing impatient. They want their money put to active use, and retailization is only going to swell the number of voices in that chorus.

GPs will need to gain efficiency if they are to move nimbly enough to take advantage of opportunities. They will need to start by ditching PDFs and paper-based subscription processes. Then they will have to find a way to smooth out payment infrastructure while embedding compliance checks in that payment system.

Once those client-facing processes are sufficiently upgraded, the challenge becomes bringing the middle and back offices up to the same standard. Liquidity management, current NAV calculation, and other critical elements of running an alternative asset management firm can prove to be market differentiators.

At that point that all this has come to pass, though, a firm can consider itself ready for retailization and can then turn its focus more fully to finding those opportunities to deploy capital.

That is, after all, what a GP ought to be doing; it is the reason why people choose that line of work. To free them up to do what they do best, they might find it crucial to find a tech partner who can help with planning and systems implementation.