UK retail investors missing out on alts
UK retail investors may be missing out on the benefits of alternatives because of regulatory restrictions.
The UK’s financial watchdog, the Financial Conduct Authority (FCA), aims to prevent retail investors from investing in complex or high-risk investments that they may not understand, including alternatives.
Retail investors who do wade into alternatives must give up certain protections, such as the transparency provided by public markets and access to the Financial Ombudsman Service.
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However, this may be discouraging more experienced investors unnecessarily, while leading to poorer outcomes for those who invest in the space, according to Alex Davies, chief executive of Wealth Club.
“In most cases, the credit risks in private credit are comparable to those seen in the publicly traded investment grade, high yield and ABS markets – all asset classes that are firmly within the scope of what’s available to retail investors,” he said.
“But the result of the current regulation is that many retail investors can’t access alternatives at all, except through the few publicly traded investment trusts.
“For those that do, the higher level designation means giving up certain protections, with the result that the alternative investment space is at risk of being targeted by rogue or poor operators operating in a regulatory grey zone.
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“That is bad news for the investors and bad for the perception of the alternatives investment universe more generally.”
He added that this also means it is difficult to access alternatives through conventional retail investment wrappers, such as ISAs and Sipps, which can penalise high-net-worth retail investors.
“That is a serious problem for higher earning investors, especially in private credit, who face punishingly high rates of tax on returns,” he said.
Davies also said that UK structures are currently at a disadvantage compared to those in other countries. For example, European semi-liquid funds are designed to be better suited to smaller investors than traditional closed-ended, GP/LP fund structures.
“In the UK, these structures can only be sold to professional investors, but their US sibling, the perpetual Business Development Company, is far more widely available, and, as a result, has successfully raised hundreds of billions of dollars,” he said.
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However, some experts think it is right that retail investors should continue to be discouraged from investing in alternatives.
“The industry has been vocal about opening up private markets to retail investors, and, given that this would unlock billions of dollars of capital, it’s easy to see why,” said Myles Milston, chief executive of private markets tech firm Globacap.
“However, this may not be in the best interests of retail investors, as private markets operate a lot differently than the public markets they’re used to investing in. Private assets are less liquid, fees are higher, and it’s very difficult to get transparency into the value of assets.
“Pure retail investors should be wary of investing in opportunities where their investment can be locked up for a long, undefined time period.”
