Key Players in the Private Market Ecosystem

In the last ten years, the private investment space has all but doubled. From $9.7 trillion in 2012, it grew to $22.6 trillion in 2022! Among the main reasons for this growth are the consistent long-term performance (albeit with some fluctuations), and the increase in participation by individual and HNI investors.

In the last few chapters, we have explored in detail the role that each of the main participants in the private markets play. From the entities involved in the alternative investment funds to the different sources of investment (either directly or through a wealth manager), we have covered it all.

In this chapter, we will focus on the investors – particularly, the individual ones.

When it comes to individual investors, there is a certain homogeneity in the role that they play. Whether it be the private or the public market, they are always on the lookout for good investment opportunities that can grow their capital.

Now, it goes without saying that in private markets, the participation of HNIs and UHNIs will be much higher than retail investors. We will cover the details of their involvement and the role that they play in the private markets.

HNIs or High Net-Worth Individual investors come with significant wealth. In India, HNIs are investors who have more than ₹5 crores of investible surplus.

Investible Surplus:

It is the amount of money that we have left for investments after we have paid for all our monthly expenses and any other necessary obligations. It is a liquid asset in ready-to-invest form and it does not take into account any fixed or illiquid assets.

For example, if you have long-term investments worth ₹10 crores and real estate worth another ₹10 crores, these will not be considered as a part of your investible surplus. But, if you have ₹2 crores in your bank account, maybe even in a fixed deposit, this will count!

Please note, that the exact definition of an HNI varies from one country to another, but the basic idea remains the same. These individuals have the ability to invest large amounts at one time. The larger ticket size means they can easily access other investment assets that may even be off-limit for retail investors.

HNIs are quite an active participant in the alternative investment space. In 2021 alone, HNIs and family offices accounted for 12% of the total capital raised by private equity funds globally.

Role of Angel Investors

Angel investors are HNIs and UHNIs who provide capital, particularly to startups in their nascent stages. The name is a nod to the fact that at such early stages, other sources of capital can seem elusive. At such times, angel investors come forth like saviours to provide some life.

Unlike other investment avenues, angel investors bring more than just money to the table. They often come with a wealth of experience and industry connections. Their invaluable mentorship can guide startups through their formative challenges. These investors generally invest in startups in sectors they are familiar with so that they can provide targeted guidance and industry-specific insights.

Apart from that, their belief in a startup’s potential can also serve as a badge of credibility and attract further investments.

It was in 2009 that angel investor Krishnan Ganesh decided to invest in a fledgling idea to transform India’s e-commerce landscape. Kunal Bahl and Rohit Bansal were nurturing a vision for a daily deals platform that eventually pivoted to become Snapdeal.

Krishnan Ganesh’s investment went beyond capital. It was a testament to his belief in the founders’ vision and the startup’s potential. The challenges were steep. After all, they were competing against well-established e-commerce giants in the Indian market. Yet, with Ganesh’s strategic guidance and the founders’ relentless pursuit of innovation, Snapdeal began carving its niche.

By 2011, Snapdeal had transformed into a full-fledged online marketplace with millions of users. This pivot and growth led to a substantial increase in its valuation. In 2014, Snapdeal announced a funding round that skyrocketed its valuation to around US$1 billion and made it a unicorn.

The growth trajectory didn’t stop there. In 2015, Snapdeal raised another round of funding, further boosting its valuation to approximately US$4.8 billion. This was a remarkable increase from its early days and a testament to the foresight of investors like Ganesh. His early bet on Snapdeal exemplifies how angel investments can be the key to turning visionary ideas into successful business realities.

• Diversification and Risk Mitigation: Private assets can have low correlations with traditional asset classes and this provides a hedge against market volatility.This means, that during times of market volatility when the stock market is experiencing a downfall, allocating a part of the portfolio towards defensive assets can be a good idea. It can protect the downside risks and retain the value of the portfolio.
• Return Potential: Private markets offer the potential for high returns. Whether it is private equity, venture capital, real estate, or hedge funds, these assets allow investors to capitalise on unique opportunities.
• Control and Influence: When the ticket size is large, investors are more comfortable with some degree of control over their investments. In the public markets, this is generally not possible.

However, in the private investment space, HNIs have more control and influence over their investment decisions. They can actively participate in strategic decisions and sometimes even sit on the boards of the companies they are investing in!

Let’s take a look at how the HNIs, UHNIs and family allocate their assets:

Source: https://www.fool.com/research/high-net-worth-alternative-investments/

Retail investors are individuals who invest in financial markets as non-professionals to build their independent returns-generating portfolio. They may seek help from brokers, investment advisors, or financial planners to invest with caution. They typically invest small amounts or purchase assets falling under the purview of a limited variety of financial instruments or investment options due to the retail nature of their investment and risk-taking capacities.

So will retail investors be welcomed into the fold, alongside institutional investors and high-net-worth individuals?

A February 2023 Bain & Company report says private markets, particularly private equity, cannot wait to onboard retail investors who have the financial capacity and the risk appetite to invest in various projects. This is because of the following numbers:

• Individual investors own about 50% of the US$275-295 trillion total assets under management worldwide.
• However, when it comes to alternative investment funds, their share is only 16%!

This means the opportunities are endless, given changes in regulatory supervision, asset variety, and technology.

Many retail investors are looking for alternative investments because of the benefits of diversification. Some options that have gained traction and become popular among retail investors are private equity, venture capital, commodities, cryptocurrencies, and real estate, among others.

Estimated global alternatives AUM by investor type (2022-2023 CAGR):

The private markets, in general, seem quite alluring to retail investors since they are almost an entirely unexplored space.