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Article by Norman Finster, EY Luxembourg Consulting Partner, Alternative Investments Leader, as published in Insight/Out magazine #35.
For years, the direction was clear: retail demand for alternative investments is accelerating. These asset classes are attractive for potential higher returns, improved diversification and reduced exposure to market volatility, ultimately enhancing the risk-return profile compared to traditional portfolios. Hence, it is no surprise that retail investors are also looking for vehicles that promise more compelling returns.
Historically, alternative asset classes were mostly out of reach for the average investor, requiring high minimum investments. Regulation such as the European Long-Term Investment Fund (ELTIF) 2.0 framework has now reduced some of the barriers. In recent years asset managers have expanded their offerings through ELTIFs, while the UCI Part II has seen a revival. Still, the market remains nascent, and some early movers have capitalized on their head start.
Unfortunately retail adoption has lagged expectations with a slower uptake than anticipated. EY recently embarked on open conversations with major asset managers and other key market players in this space to explore the reasons behind this phenomenon.
Europe is still saving – not investing
Despite having the means, Europeans are reluctant to invest in such products. Europe has long been and still is a continent of savers – not investors. Over €10 trillion of household wealth (around 41%) is still parked in cash and savings accounts. By contrast, in the US, just 16% of household wealth sits idle.[1] So why are Europeans choosing low-yield bank deposits instead? The answer might lie in low financial literacy levels.
The difficulty for investors to understand semi-liquid products
Only 18% of EU citizens are considered highly financially literate,[2] which can become a barrier when considering the complexity of semi-liquid private assets – sometimes even a challenge for the investment advisors of retail investors who are still more familiar with traditional UCITS products. Retail investors also like to understand what companies they are investing in (e.g., US technology stocks). However, many existing semi-liquid retail products have been launched with indirect fund of funds strategies, which are often perceived as opaque and costly. Hence, to overcome investment barriers, not only retail investor education matters but also better understanding retail investor preferences.
Another point is the traditional lack of transparency and accessible data found in public markets. A shortage of performance data in sectors like Venture Capital and Private Equity dampens investments, even as demand for private markets grows. On top of that the mechanics of semi-liquid products that usually come with liquidity management tools – such as notice periods, gating, lock-ups, etc. – are difficult to understand and require as much educational focus as the investment strategy.
Shifting the focus: from investor readiness to industry dynamics
While investor hesitation is one factor, the distribution strategy also plays a crucial role. The current distribution model, brand dynamics and technology could be reconsidered.
Distribution remains a key challenge
Most asset managers rely on intermediaries (typically retail banks or wealth managers) to distribute their products to retail clients. The complexity of the fund mechanics of semi-liquid ELTIFs and UCI Part II vehicles makes these products already more expensive in their administration. On top of that fund managers pay significant fees to prime distributors, such as top-tier wealth managers. Such high entry barriers effectively restrict participation to only the largest or best-capitalized managers.
Brand familiarity – a key differentiator
Even when semi-liquid funds reach the market, success often hinges less on liquidity or expected returns but more on brand strength and track record. Investors tend to stick with names they know, rather than explore unfamiliar providers offering potentially better-tailored solutions. In this sense, brand trust continues to outweigh product innovation, limiting competition and slowing broader offerings and retail adoption.
Technology development supporting semi-liquid distribution is showing traction, but adoption is lagging
Despite constant industry conversation around innovation, technology is not yet playing a transformative role in the distribution of semi-liquid products. While a few markets with dedicated solutions designed to support alternative investments exist, technology overall remains underutilized and has achieved little traction in expanding retail success.
A key situation for technology is in the settlement area. A couple of considerations expressed by stakeholders show interesting aspects:
- Tokenization is promising but not much utilized, with significant adoption expected in five to 10 years. At the distribution support level, recently developed blockchain-based solutions enabling order aggregation and disaggregation of retail investor orders and Ultimate Beneficial Owner (UBO) tracking show promising results.
- Another promising technological development is API-based account opening, which facilitates distributor account opening and related AML/KYC processes alongside the distribution chain.
So, is the retail market ready for semi-liquid products?
The answer depends on the retail investors we are looking at. Alternative semi-liquid products can be an interesting addition and diversification element to the portfolios of UNWI/HNWI and mass affluent types of investors while the mass retail market is not yet ready for such complex products. Appetite can only be sparked by breakthrough legislative initiatives, such as tax incentives. Hence, it will be interesting to see what impact the recent changes to 401(k) eligible investments will have on the adoption of semi-liquid alternative funds by US retail investors.
How can alternative asset managers be successful within this market?
Entry barriers to strong distribution networks for semi-liquid products are high. The general criteria for fund distribution success, such as track record, fund size and compelling investment story also apply to these products. In addition to that the element of brand recognition by retail investors plays a key role. Successful funds always have a clear distribution strategy with regard to targeted investors, distribution countries, the use of intermediaries and a strong relationship with their distribution network. Asset managers must also consider investing in the education of their distribution network to be successful. When it comes to product design simplicity is key and fund managers should therefore resist the temptation of making fundamentally illiquid asset classes look liquid.
[1] Unlocking Europe’s Savings and Investment Potential, ALFI, 14 March 2025
[2] Monitoring the level of financial literacy in the EU, European Commission, July 2023
