Private Equity's Private Wealth Challenge

In Brief: In a recent Fund Shack podcast, Cyril Demaria-Bengochea, Julius Baer's Head of Private Market Strategy and EDHEC Business School professor, dissected the complexities of bringing private equity to high-net-worth individuals. With institutional capital becoming constrained, fund managers are increasingly targeting private wealth—but face significant hurdles. Demaria-Bengochea argues that the "democratization" of private equity remains in early stages, with evergreen structures representing only 1-2% of private market assets under management, despite industry enthusiasm for tapping this capital source.

Big Picture Drivers:

• Institutional limits: Traditional capital sources are reaching allocation thresholds, pushing managers toward private wealth.

• Structural complexity: Individual investors face challenges with minimum investment sizes, diversification needs, and time horizons.

• Time dimension: Unlike traditional investments, private equity adds a third dimension—time—making it difficult for investors to model and manage.

• Toolbox evolution: The industry is developing various fund structures to address private wealth needs, though no single solution dominates.

Key Topics Covered:

• Access challenges: Small allocation percentages (1-2%) don't move the needle, while proper diversification requires substantial capital.

• Evergreen funds: These structures offer convenience but represent a tiny fraction of private market assets.

• Return dispersion: Direct investments show highly skewed outcomes, while fund structures create more bell-curved return profiles.

• Market conditions: Q1 2025 shows subdued large deals but active mid-market activity, particularly in buy-and-build strategies.

Key Insights:

• Capital constraints: Even for $5M net worth investors, allocating 5-10% while achieving proper diversification across strategies, industries, and managers is challenging.

• Structure complementarity: Different fund structures serve different client needs rather than competing with each other.

• Leverage myth: Academic research shows leverage contributes only 20% to buyout performance post-2008, down from 33% before.

• Democratization barriers: Real access requires education, proper structuring, and addressing the illiquidity challenge for individual investors.

By The Numbers:

• 1-2%: Current market share of evergreen fund structures in private markets.

• 6x EBITDA: Regulatory cap on leverage for private equity deals in US and Europe.

• 20%: Portion of private equity returns attributed to leverage effects post-2008 (down from 33% pre-crisis).

• 15-20%: Allocation threshold that unconstrained investors (family offices, HNWIs) typically don't exceed.

Memorable Quotes:

• On investment complexity: "Private markets force you to know how to stand up, walk and run. In traditional asset classes, you can still crawl."

• On fund structures: "It's not about winning, it's about the new equilibrium and how you organize your toolbox."

• On democratization challenges: "We see that there are multiple dimensions, like multiple balls to juggle with. It's a complex topic."

• On performance drivers: "Sometimes people are dazzled by the leverage effect in leveraged buyout, but before the global financial crisis only one-third of performance came from leverage."

The Wrap: While private equity continues its push to access high-net-worth capital, success will depend on realistic expectations, innovative structures, and education. The industry must overcome significant structural challenges, including matching time horizons and investment minimums to individual needs. As Demaria-Bengochea suggests, improving transparency and better sharing of value creation could ultimately make private markets more accessible and appealing to individual investors.