Private capital groups have warned of a potential wave of mis-selling claims from wealthy investors if advisers fail to adequately explain the risks involved to customers.
Wealth managers and advisers are increasingly offering private equity, private credit and infrastructure products to individuals in Europe seeking to diversify their portfolios and boost returns.
Demand for access to private assets has led to a surge in investment in so-called evergreen or semi-liquid funds in the UK and Europe. More than €88bn had been invested by June this year, more than double the amount in early 2024, according to consultancy firm Novantigo.
But private capital groups told the Financial Times that some intermediaries lacked experience and might not have the expertise to assess the products and explain the lack of liquidity, which can make it difficult for investors to withdraw their money during times of market stress.
Although investments can be made monthly, money can only be withdrawn every few months, meaning the products are not suitable for individuals who are either unwilling or unable to lock cash away for indefinite periods of time.
"The big concern I have is that [intermediaries] say it's liquid," said one executive at an asset manager, who said their firm was putting a lot of time into educating potential sellers about their products.
They added that intermediaries who failed to properly explain the funds' illiquidity put themselves at risk of mis-selling complaints.
A partner at a leading alternative asset manager said smaller intermediaries often lacked the knowledge needed to do proper assessments of their products compared with larger banks that distributed them.
There was a "thorough process we have to pass to get on a JPMorgan [Chase] or Julius Baer platform, for example, which isn't typically the case with less-scaled distributors", the person added.
Steffen Pauls, co-chief executive and founder of Moonfare, an investment service that provides private equity products, said that clients needed to understand private market assets could not be sold on demand.
"Unlike public equities, these investments are designed to be held over long periods. If wealth managers and advisers don't fully understand this dynamic, or fail to communicate it clearly to their clients, the risk of disappointment rises sharply."
In the UK, wealth managers are increasingly considering offering semi-liquid funds that provide access to private markets called Long-Term Asset Funds after the Financial Conduct Authority in 2023 gave the green light for them to be offered to sophisticated individuals. Investors in Europe have access to a similar product called a European Long-Term Investment Fund.
Mara Dobrescu, senior principal for fixed-income strategy ratings at research firm Morningstar, warned these funds "come with limited withdrawal opportunities, and they have not yet been tested in a severe risk-off environment".
She added that "several quarters of withdrawals in a row" could force managers to halt withdrawals from the fund and this "could be difficult for retail investors to stomach".
There was a "marketing frenzy around evergreen" funds and the risks were not necessarily made clear, she added.
RBC Wealth Management, Evelyn Partners, and Quilter Cheviot are among the wealth managers aiming to offer greater access to private markets to wealthy clients. DIY investment site Hargreaves Lansdown earlier this month said it would offer access to LTAFs through personal pension wrappers.
Traditional fund groups such as Schroders have launched their own LTAFs, while other European players such as Carmignac have formed partnerships with alternative asset specialists.