Alt Investments
Regulators Must Craft New Rules For Growing Private Markets

Private market investing has been a constant theme in wealth management over recent years. Are regulations keeping up with this? Given the issues at stake, the industry must work with watchdogs such as the SEC to ensure that a big prize isn't lost, a platform business argues.
Regulators should be encouraged to talk with wealth managers,
widen investor access to private markets, and capture
diversification and yield benefits, Michael Weisz,
co-founder of YieldStreet, a platform in
the sector, says.
At present access to these areas is still a game for the richer
end of the HNW population, and for large institutions. There have
been tweaks, however: On August 26, 2020, the Securities and
Exchange Commission adopted amendments
to expand the definition of “accredited investor.” The
changes allowed individual investors to qualify as accredited
investors based on defined measures of professional knowledge,
experience or certifications, rather than solely based on net
worth or income.
For many months, this news service has chronicled moves by
various firms such as Moonfare (Europe), CAIS (US), iCapital
(US), and ADDX (Singapore) to make access to alternative
investments more efficient, and ultimately, more
“democratic.” Even for HNW investors, ticket sizes have
started from $1 million or more, making this more of an ultra-HNW
game. But that’s unsustainable, so it is argued, because this
means millions of investors are forced to hold listed equities,
conventional bonds and other assets that aren’t delivering the
goods. Rising inflation and interest rates raise the stakes
further.
Michael Weisz, co-founder of YieldStreet, thinks a constructive
dialog with regulators can clear a path forward.
“The role of the regulator is always to protect the smaller
investor. Investor protection has been historically challenging
due to lack of transparency, and lack of widespread information.
The controls regulators historically had in place in many cases
therefore made sense in that context,” he told Family Wealth
Report.
“Today, there are much more sophisticated ways to communicate
with retail investors, for instance by using technology. While
regulators should continue to require the right levels of
disclosure and education for the benefit of the retail investor,
they should be promoting rather than restricting access to
private markets,” Weisz continued.
“Under the current model, due to lack of access, people are at
times encouraged to hold `meme stocks’ and other risky public
markets investments that they don’t understand. They [retail
investors] are also trading against professional investors who
have access to more sophisticated information and use it against
them. In private markets, and especially with us, they are
investing alongside professional managers. We, as an industry,
don’t talk about that enough. People are being harmed by not
getting access to investment opportunities that have been
carefully vetted for them,” he said.
The situation does appear to be changing. In September 2021, an
advisory group for the SEC voted to recommend making it easier
for less-wealthy people to invest in private funds. The SEC’s
Asset Management Advisory Committee approved a report
recommending that the regulator increase ordinary investors’
access to private equity, private debt and real estate vehicles
(Wall Street Journal, September 27, 2021).
The tectonic plates of how firms are owned are moving, with the
share of those in private hands rather than being listed on
the equity market, rising since the dotcom era of the late
1990s.
That means that investors need to adjust their exposures to keep
up, or they will miss a big chunk of what drives risk-adjusted
returns. For example, private market investments – such as
private equity and credit – have exploded 30-fold from 2000 to
$30.5 trillion as of 2021, and that figure is likely to have
risen since. In 2021, ALTSMARK, a US software solution firm for
the private capital sector, said that more than a third of
registered investment advisors could be put out of business
within a decade if they don’t include alternative assets in their
clients’ portfolios.
To support mass adoption of private market investing, there are
five foundational requirements: Access (to exciting and enticing
investment opportunities), Education (so people feel that they
are able to make informed decisions and mitigate risk), Model
Portfolio (to eliminate choice theory issues and simplify asset
allocation), Liquidity (at some reasonable frequency, as long
maturities may not work for many), and Trust/Transparency, he
continued.
Platforms and membership
YieldStreet is a platform that enables investors to build
portfolios in areas such as private markets. It has about 400,000
members and, so far, about $3.5 billion has been invested in this
asset class area via the platform.
Weisz notes that the private market space is still relatively
new. The industry must embrace its educational role through
shorter, snappier and more succinct copy that avoids jargon.
Yieldstreet has a blog, education resources and related content
to help.
The stakes are high. With as much as $70 trillion of wealth due
to be transferred to younger generations, there are around 15
million US accredited Investors and about a further 30 million
earning $100,000 or more a year – a big market for these areas.
The same pressures and dynamics, to varying degrees, operate in
Europe and the UK.
Regulatory concerns
Back to the subject of regulation, a concern that watchdogs
around the world have had is that private market investing is
typically less liquid than holding a fund of stocks or bonds.
With open-ended funds, for example, there can be a mismatch
between the liquidity expectations of clients and the underlying
assets. (In Europe, this can be problematic with real estate
funds, as seen with temporary closures of UK property funds that
were hit in the summer of 2016 after the Brexit referendum.)
Regulators want to avoid nightmare headlines of retail clients
trapped in funds which they cannot get out of.
However, scale will help with the liquidity question as more
people enter the space, Weisz said. “The community of people
investing in private markets should be large enough to be able to
support the creation of secondary markets…this doesn’t need to be
daily liquidity.”
Under the chairmanship of Gary Gensler, the SEC is considering
imposing some of the reporting/disclosure requirements on
private equity and hedge funds that apply to listed companies.
That might dampen some of the attractions, at least on the
margins. The regulator is mulling rules to require more private
companies to disclose information related to their finances and
operations. Companies that are privately held often
circumnavigate current reporting rules, which are based on
the number of investors. Gensler and the SEC reportedly want to
close those loopholes. In January 2022 the SEC proposed a series
of rule changes that call for more information disclosures,
faster, from a larger pool of private equity and hedge funds. For
both classes of investors, the rules would require next-day
disclosures of significant events.
Whatever certain bumps in the road there are, YieldStreet’s Weisz is convinced that widening access ought to be a priority, and his firm is determined to be a part of that process.
In a high inflation environment, with all the issues around
volatility, rising rates and fears of recession,
Russia/Ukraine/supply-chain
disruptions and shortages…”inaction is more tempting
than taking action. We really have to think about where we should
be comfortable investing,” he said.
Weisz likes areas such as single-family rentals and multi-family
rentals. “The best hedge against inflation has always been real
estate. Owning the actual asset has always been a good inflation
hedge.”