Retail Investors May Hold the Key to Private Markets' Next Wave of Growth

Financial markets trigger words like sell-off, liquidity risk, and volatility have been trending throughout 2025. Some have been using more welcoming terminology to counteract their distaste, like deregulation, private credit expansion, and democratization of private markets.

In May, Paul Atkins said the SEC was reconsidering a 23-year-old restriction on closed-end funds with retail investors that prevents those funds from having more than 15% of their portfolio in private markets and restricts these investments to the minimum initial investment requirement of $25,000. Additionally, the SEC and the CFTC voted to extend the compliance date from June 11, 2025 until October 1, 2025 for Form PF amendments, postponing the enhancements to confidential reporting for certain SEC-registered investment advisers to private funds. This delay affords firms extra time to roll out structures tailored for retail investors and to prepare for the reporting complexities that Form PF will bring.

This all points to the rise of retailization of private markets. The risk-versus-rewards dialectic has intensified on both sides, with some experts sounding risk alarms, and others enthusiastic about more capital and new customers. Let’s take a look at how upcoming regulatory changes could reshape the investor profile for private markets and how asset managers can prepare for a potential torrent of capital from retail investors as well as how these investors’ expectations, behaviors, and servicing needs differ from those of institutional clients.

Ripples of retailization at your shore with ETFs and SMAs

Historically, the direct-to-customer segment was exclusive with minimum investment thresholds only reachable by accredited investors or ultra-high-net-worth (HNW and UHNW individuals). They remain an essential cohort, poised to inherit an astonishing 42% of the total Great Generational Wealth Transfer, about $36 trillion over the next 25 years. Big players including BlackRock, State Street, KKR, and Apollo have unveiled ETFs, target date retirement funds, and other investment vehicles aimed at HNW and less wealthy retail investors.^[i]

Asset managers like Nuveen have been pounding the direct indexing and separately managed account (SMA) pavement as alternatives to ETFs over the past couple of years to reach wealthy individuals; and are now working to expand access to less affluent retail consumers with niche interests, like sustainability funds and thematic investing, as well as private credit. BNY Mellon’s 2024 global asset managers survey revealed that just over half of asset managers globally expect direct-to-consumer to offer the largest opportunity in the longer term, anticipating the growth opportunity to unfold over five to 10 years.^[ii]

Proliferation of retail wrappers

Last month, Empower, the nation’s second largest retirement plan provider, opened access to private equity, private credit and private real estate funds to participants, to “pave the way for private markets investments to be included within defined contribution retirement plans.”^[iii] Retail investors have been exposed to alternatives through pension funds increasingly over the past decade as they jumped the trend in seeking diversification and stronger yields. Public pension funds now have more than 30% allocations to private market classes. Recently though, the end of the low-interest rates era, the decline of private equity valuations, and the lack of exits has left most pension funds overallocated in private markets. Yet, the plateau of private equity has not hindered the private credit boom, still surging as the 200 largest U.S. retirement plans reported a 57% YoY increase in private credit assets, reaching $198.4 billion as of September of 2024.^[iv]

Going retail in the era of complexity

Asset managers zealous about capturing retail attention are preparing to handle these investors’ expectations, behaviors, and servicing needs, as they differ from those of institutional clients. Of course, digital native investor millennials and gen Z put a premium on digital, highly personalized, transparent experiences. Their growing appetite for complex, illiquid/semi-liquid assets highlight the need for more sophisticated portfolio construction, risk modeling, and operational oversight. For example, in the realm of private credit, unlike standardized public loans, middle- and back-office operations must process bespoke repayment structures aligned to a borrower's cash flow or business needs, tailoring terms like specific coupon rates, covenants, or fee structures. Moreover, the new retail wrappers require stringent valuation discipline with more frequent liquidity windows and NAV reporting: quarterly, monthly, and daily NAVs for certain ETFs and interval fund vehicles. Achieving scale won’t be a snap with the added complexity and volume.

Scaling for retail AUM

To tap into the growth of the retail market, managers will have to apply their ingenuity and technology investment behind addressing these issues in a scalable and sustainable way. For example, reporting and communications using modern tools will be critical in helping firms generate fast responses and self-service interactivity for a massive retail base at greater scale. Tailored, on-demand reporting gives investors customized insights, fostering loyalty and enhancing the client experience. AI is poised to optimize much of this. Recently, the Wall Street Journal reported on a wealth management startup using an AI assistant to reach younger digital natives by dispensing financial advice using gen Z slang. Ultimately, the new SEC light-touch approach may result in blurring the lines between institutional and retail for private market tactics and the way managers engage with a new crop of retail investors.

Risk management mindset: Thriving in complexity

Moody’s cautioned that, “If growth [from retail investors] outpaces the industry’s ability to manage such complexities, such challenges could have systemic consequences. Private asset managers also face reputational risk if—in a scramble to grow share—credit standards slip or risk management falter.”[v]  Firms looking to capitalize on this opportunity stream should be cautious about jumping in before they are fully prepared to handle the complexity of managing these vehicles. For example, the administration of SMAs can be onerous if the firm is not in command of its datasets via smooth data flows to and from a centralized source, particularly when accounting for and calculating tax liabilities. Portfolio automation can also open access to new investors because technology makes certain strategies scalable for clients with $100K+ instead of just HNW investors. Advanced investment operational platforms will also help ensure regulators that clearing, settlement, transfer, and custody is accurate and secure.

New access for non-institutional investors

Fee compression and commoditization of returns have made pursuit of individual investors and the associated personalization essential for differentiation and client retention. Likewise, private markets' meteoric rise is evolving from a niche alternative to a core allocation for many institutional and now, increasingly, retail investors. Data and technology are playing a central role in enabling better risk monitoring, more accurate reporting, and the infrastructure needed for more retail investors.

Without the right systems, controls, and support in place, firms risk reputational damage, investor dissatisfaction, and heightened regulatory scrutiny. With the right systems and controls in place, firms can take advantage of the next wave of private credit’s growth.

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Cesar Estrada is Head of Private Markets at Arcesium

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Footnotes

[i]  Business Insider, June 10, 2025. https://www.businessinsider.com/retail-investors-private-equity-debt-market-401k-liquidity-moodys-2025-6?

[ii]  https://www.bny.com/corporate/global/en/insights/future-of-asset-management-trends-report.html#distribution

[iii] https://www.businesswire.com/news/home/20250513423930/en/Empower-to-Offer-Private-Markets-Investments-to-Retirement-Plans

[iv] PIonline, February 4, 2025.  https://www.pionline.com/pi-1000-largest-retirement-plans/private-credit-assets-jump-over-50-largest-pension-funds-pensions

[v] Matt Wirz, Moody’s Sounds Alarm on Private Funds for Individuals, The Wall Street Journal (Jun. 10, 2025).

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group