The $115 billion app-based banking platform Revolut will offer users access to private markets funds from some of the world’s best known firms from as little as €1, but experts told Spear’s the move will create new risks and could have limited impact for the funds involved.
Revolut announced on Monday it will provide customers in Europe access to investments spanning private equity, credit and infrastructure, with the lender teaming up with alternative asset managers Apollo, Ares, Hamilton Lane and Partners Group to provide the funds.
Rolandas Juteika, Revolut’s head of wealth and trading for the European Economic Area, said private markets have long been the missing asset class in the average investor’s portfolio, ‘not for lack of interest, but for lack of access’.
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Some commentators, however, believe a slump in sector returns on top of a wave of recent redemption requests – largely from high-net-worth individuals – will dampen interest in the bank’s new offering, despite customers needing just €1 to start investing.
‘Revolut’s brand is gaining widespread recognition, so this is a logical move. But progress is likely to come in small steps, not giant leaps,’ said Amin Rajan, chief executive of investment consultancy Create Research.
‘Demand is likely to be subdued for two reasons. First, retail investors do not as yet have the necessary level of financial literacy to go into illiquid asset classes. And, second, private markets have entered a prolonged era of lower returns, with dry powder or uninvested capital near all-time highs.’
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After a long period of growth for private assets it has become increasingly difficult to deploy the rising mountain of dry powder, and that the attractive returns once enjoyed by the sector will not reappear unless central banks make significant cuts to interest rates, something Rajan calls ‘unlikely’.
Robin Powell, a wealth management expert and editor of The Evidence-Based Investor believes a €1 minimum investment and the promise of an asset class once reserved for the rich is ‘a powerful pitch’, but he questioned the timing of the launch.
‘Revolut has opened this door just as the semi-liquid model is failing its first test. Partners Group has capped withdrawals on its $8.6bn evergreen fund, while Apollo and Ares have both restricted redemptions. Three of Revolut’s four partners have recently stopped investors getting their money back.
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‘The case that private equity beats public markets, adjusted for leverage and illiquidity, is thinner than the marketing material suggests. And institutional distributions have stalled, so ordinary savers are being invited in as professionals look for the exit.’
Indeed, investors attempted to pull more than $1.5bn from one of Ares Management’s flagship private credit funds in the second quarter of this year, prompting the firm to cap redemptions at a 5 per cent limit.
Historically, private markets have been used by institutional investors to target long-term growth and increase portfolio diversification but high minimum investments, often exceeding €100,000, and overly complex paperwork has meant the asset class has previously been closed off to the majority of individual investors aside from the very wealthy.
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Revolut’s Juteika now expects that to change. ‘By partnering with giants like Apollo, Ares, Hamilton Lane, and Partners Group, we are completely changing the dynamic,’ she said.
‘This isn’t just about offering lower entry points, it’s about giving our users the tools to build sophisticated, diversified, and resilient portfolios for the long term. These funds are intentionally structured for patient capital, and we believe they will fundamentally level the playing field between everyday portfolios and institutional private market investment strategies.’
Even if the move is a success for Revolut, Ludovic Phalippou, professor of financial economics at the University of Oxford’s Saïd Business School, queries just how much money this will bring in for the likes of Apollo, the largest of the four alternative managers to have signed up with the bank.
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When asked if there will be significant retail demand for the private market funds, Phalippou said: ‘Probably, because investors will be attracted by the Apollo name and impressive-looking performance figures that they do not know how to interpret.
‘But the sums are unlikely to matter much to Apollo. Even if an extraordinary 10 per cent of Revolut’s $67.5 billion of customer balances went into these products, that would be only about $6.75 billion. This is a one-off stock, not $6.75 billion every year, and is less than 1 per cent of Apollo’s assets. It is clearly more of a headline and a marketing exercise than a major new source of capital.’
He added: ‘It is clever publicity, but it creates risks. If customers are shown misleading performance figures or do not understand the fees and liquidity restrictions, Revolut [could] face litigation.’
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While there are question marks over the potential uptake of the new offering, one consequence of the launch may be to drive down the fees that more traditional wealth managers are charging their existing HNW customers for access to private markets.
Private banks have long been accused of ripping off wealthy clients. David Bailin, the former Citi CIO who has set up a new wealth advisory firm called CIO Group, recently told Spear’s that he launched the low-cost firm because investors have grown tired of overpaying.
Phalippou said: ‘Yes, Revolut’s offering could put pressure on traditional wealth managers’ fees. It is offering access without an additional platform or transaction fee, while some wealth managers charge heavily for essentially providing access to the same products.’
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Rajan added: “It could be disruptive but only if Revolut’s fee model is competitive by a wide margin. Traditional firms have a superior client service model that could be expensive for disruptors to emulate as incumbent firms offer a variety of services on top of investment, such as estate planning, wealth transfer and healthcare.”
Revolut’s offering could mean that there is a mismatch between the expectations of uninitiated retail investors and the reality of being invested in private markets, said The Evidence Based Investor’s Robin Powell.
‘Revolut takes no principal risk here. It earns distribution revenue on other firms’ products while the customer carries the illiquidity,’ Powell said, adding that extra dangers lurk because the rest of the bank’s proposition has trained people to expect instant transfers, instant currency, and instant trades.
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‘Putting a multi-year illiquid fund in that interface, a few taps [away] from crypto [in the Revolut app], invites exactly the misunderstanding a tick-box suitability test will not fix. Revolut has picked the most aggressive distribution route available for the least liquid thing it sells.’
The chief executive of Carlyle, another large private markets firm not yet on Revolut’s platform, recently said the industry should have called these vehicles ‘sometimes not liquid at all’, noted Powell. ‘Millions of app users are about to learn what that means.’
