As Europe’s ELTIF 2.0 democratises private markets, it’s giving qualified individuals* the opportunity to adapt their portfolios to a period of great change.
It’s a time of decarbonisation, digitalisation and deglobalisation that calls for new investment ideas. The traditional 60/40 public markets equity/bond model may no longer be the most effective way to build a diversified portfolio. Instead, this new era brings novel investment opportunities and fresh ways to diversify risk.
That largely explains why large investors like pension funds, endowments and family offices have been turning to ‘private markets’ in recent years, as opposed to relying entirely on public markets such as stock exchanges and bond markets. Private markets offer qualified investors better access to the businesses driving change, as well as the chance to increase portfolio diversification to guard against financial market volatility.
But it’s no longer just large investors who can participate in private markets. With perfect timing, the European Commission introduced its European Long-Term Investment Funds (ELTIF) 2.0 regulation in 2024, aiming to help qualified retail investors and smaller institutions access these markets. Arguably, this is the next chapter in the democratisation of investment.
The development comes at a time of fast evolution for private markets. Notably, industry estimates project these markets growing from USD 13 trillion today to more than USD 20 trillion by 20301. Justifiably, there’s an expectation that the brightest day for these markets lie ahead.
* A qualified investor is a natural or legal person who has the necessary skills and resources to understand the risks inherent in transactions in financial instruments. This status gives access to investments that are not available to the general public due to their complexity or high risk.
Understanding private markets
But what are private markets? There are four broad types, taking in everything from the private equivalent of a stock to a straightforward investment in real estate companies. Unlike public stock markets, they’re all investments that require a long-term approach and are illiquid, meaning they cannot be sold instantly for cash.
Private equity is the best established and biggest asset class, providing capital for many well-known businesses since it took off in the buyout boom of the 1980s, including some of the fast-growing US tech companies. Private equity funds acquire stakes in companies, to grow them and improve profits over periods of typically three to seven years.
It's complemented by private debt (or credit), which has grown rapidly in the past 15 years as regulations have forced banks to withdraw from some areas of lending. Private debt funds now provide about USD1.6 trillion in credit to companies². In return, the funds typically receive a relatively high rate of interest.
Infrastructure investing is the business of investing in the assets that support our daily lives, ranging from transport such as roads and airports, to renewable energy and the data centres increasingly needed to fuel artificial intelligence. Loans to the companies managing these assets pay relatively high returns and it’s the nature of many infrastructure businesses that they are relatively unaffected by economic downturns.
Finally, real estate is one of the oldest asset classes. Real estate funds buy physical buildings of all types, aiming to profit from the rental yield and rises in capital value.
What are the benefits of private markets?
The main benefit of private markets is strong performance. Over long periods of time, they have tended to outperform their equivalents in public markets, due partly to what’s called the illiquidity premium. This is the extra return investors are paid for holding assets that are not easily converted into cash.
The chart below shows how private equity, private credit and private real estate performed against a range of public markets asset classes over the 15 years from 2008 to 2023.
Private equity and private credit have, respectively, outperformed stocks and bonds. But, equally importantly, all three types of private markets investments have performed well on a risk-adjusted return basis. This is judged by comparing the percentage return against volatility. Of course, there can be no guarantees that high returns will extend into the future.
At a time when deglobalisation appears to be stoking financial market uncertainty, and diversification between equities and bonds no longer works so effectively, investing in private markets can help to reduce a portfolio's overall volatility. While private market investments aren't immune to economic fluctuations – and their sensitivity varies from one type to another – they tend to deliver smoother returns over time.
What’s more, their returns aren’t correlated to those of mainstream equities and bonds. When financial markets are turbulent, as they have been during the US administration’s introduction of tariffs, this stabilizing effect can be especially valuable.
Such portfolio diversification can lift the risk-adjusted returns of investment portfolios – something the Nobel Laureate Harry Markowitz famously referred to as “the only free lunch in investing”.
Why ELTIF 2.0 funds are suitable for qualified retail investors
When the European Commission introduced its ELTIF 2.0 regime, it did so with the specific intention of making private markets suitable for qualified individual investors. Doing so would not only offer investors greater choice but also attract valuable investment capital into Europe’s economy.
The original ELTIF regulation, introduced nine years earlier in 2015, had become dated as private markets evolved. Notably, the revised framework widened the range of eligible private market investments, removed the required minimum investment of EUR 10,000 and
aligned the product with the Markets in Financial Instruments Directive (MiFID) designed to protect investors.
This means that qualified retail investors can access the potential of private markets investments within a carefully regulated environment designed to protect their interests. In other words, they should have the best of both worlds – sophisticated, institutional-style investment products and consumer levels of investor protection.
Liquidity risks
By nature, though, private markets are illiquid, which means that investors should view them as long-term investments. The ELTIF structure partly addresses this challenge by offering more regular options to redeem, or sell, than traditional private markets funds that typically require investors to commit capital for seven to 10 years.
A growing number of ELTIF funds are being launched with ‘evergreen’ structures, meaning that they have no fixed maturity date and allow investors to redeem their investments over periods such as every three months. Even this, though, is substantially less liquidity than an investor would receive in a mutual fund or exchange-traded fund with daily dealing.
Democratising private markets
With decarbonisation, digitalisation and deglobalisation changing the nature of our economies and financial markets, it’s a time to look for fresh ideas. Private markets offer the ability to invest in many of the businesses that are making change, as well as to cushion portfolios against the financial market volatility that may accompany it.
Arguably, evergreen ELTIF funds are not just democratising the world of private markets, they’re also a valuable way to adapt to the modern investment landscape.
1 Preqin, September 2024, Carne Atlas, August 2024. Blackrock 2025 Private Markets Outlook.
2 Preqin, September 2024.