James [00:00:00] Hello, and welcome to the State Street Private Markets podcast. I'm James Redgrave, Vice President of Global Thought Leadership and Editorial at State Street. Joining me today is Dr. Sven Eggers, Head of Private Markets for our Europe region. Sven has over 20 years' experience in asset fund servicing, including deep expertise in real estate and private credit. On the agenda today is the rise of semi-liquid evergreen funds, what's driving this trend and what's needed to accommodate more retail-like funds in future. Sven, welcome. I'm looking forward to getting your thoughts on this topic.

[00:00:31] Thank you, James.

James [00:00:31] So, in our latest research, we found that 55% of respondents in the EMEA region believe that at least half of flows into private markets over the next two years will come through semi-liquid retail style funds. Sven, is State Street observing any similar developments or movements within our client base? And what's the size or nature of these clients, especially given developments in Europe with regard to ELTIF and LTAF?

Sven [00:00:50] Yes, we can confirm the trend as well. So, semi-liquid products, so which are structures offering redemption facilities, maybe, but not only through open-ended funds, are gaining indeed more and more presence. We see that primarily for large investors right now, but this is getting more granular. For example, wealth investors, typically 1 million US dollar and above are now more and getting affiliated to this product group. And we thus also identified excess of untapped capital in the private wealth sector due to that. So, just to give you a bit better understanding of what this means in numbers, so, for example, the volume of ELTIFs has risen in 2024, just in this year, by about 38%. With a record number of products being launched and for the future time, we assume actually times four of this market, which would actually bring us to about 50 billion just of this semi-liquid asset classes. Interestingly, and maybe not obvious to everyone, it's especially French investors that have invested the largest part in ELTIFs yet. They come to about 7.5 billion yet. There is a specialty behind a life insurance policy in France that is demanding French products, and then comes, let's say, the typical favorites such as, for example, Germany and for others. And for LTAFs more or less the counterpart of the ELTIFs, the UK version. One of our partners has actually just recently evaluated within Survey Group, US and UK partners, that 82% of them are actually considering an LTAF launch and just 28 LTAFs. So, it's important to understand that in Europe, both products are of relevance. LTAF, especially for UK and US managers, ELTIF more for the continental European managers. So, in a nutshell, launching ELTIFs and LTAFs is efficiently likely to become more and more business critical for GPs, our clients, and thus asset services to capitalize on this trend of private market opportunities.

James [00:03:03] That's very interesting, what do you see as the sort of immediate term versus long-term potential for these products and fund types?

Sven [00:03:09] Yes, so, maybe referring a bit back to what I said, so, we see indeed these immediate trends and pressure due to, let's say, investors from 1 million US dollar on with especially, we always talk about, you know, ultra-high net worth individuals and very high net worth individuals, those certainly being at the forefront. Why? Because they are and they used to be the special focus of wealth managers that also has reasons because wealth management, especially for these types of clients, is still complicated. There is global investment strategies involved with tax and regulatory impacts that need to be treated quite carefully by the wealth managers, but this client group is actually broadening, and we already see that. And why is that? It's because, and as we see it everywhere in business, AI, especially machine learning, are also changing wealth management. Both, so, AI and machine learning are more and more being used to develop personalized investment strategies, also for investors of, let's say, an investment volume below 100,000 euros. And this trend also makes retail clients with these smaller wealth sizes are coming more and into focus, considering also that, for example, robo-advisors, are a future trend within wealth management, and this will also strengthen these trends, from our perspective.

James [00:04:39] That's interesting, you talk about technology there as well, because when we asked our survey respondents what they thought was the sort of the most important thing for driving growth in this market, they said product innovation in the semi-liquid space. So, what do you think innovation means in this context?

Sven [00:04:53] Yes, so, innovation has a very high meaning at this context, actually, and so, it is about us as fund services, as partners, especially on the tech side of our clients, to be rather the forefront of innovation. And let me, for example, as in refer to the connectivity to distribution networks, because it's in many cases, it's not just the retail investors itself, but it's distributors or wealth managers, acting on their behalf and actually pursuing and arranging these retail investors into these semi-liquid products. So, this makes us as asset services required, for example, to connect to a majority of trading platforms and SWIFT to name as an example, and to make sure that across the regions, those sought for trading platforms are within our reach. We are connected to them, and this means in a nutshell that we are already connected to more than 2,000 distributors globally. And, I think, this high number already shows that there is also a significant tech investment on our side that has been necessary within the last years to actually cope with this trend, to make sure that we're in the closest possible tech relationship to these clients, the distributors, so that it is actually tech, and joining a personal relationship to these distributors, making sure that we are connected to this demand. And this is also why, for example, we have selected a tech platform, in our case, it's iCapital, to serve for open-ended funds. So, even here, partnership has been sought for by State Street to cope with this trend. But it's not just about, let's say, being connected for, let's say, the trades and SWIFT. It's also about making sure that on the AML, or rather anti-money laundering, the know your client side, we have done our homework. So, since there are many clients now being capable and hopefully investing into these products, we also need to make sure that from a compliance side, we ensure that there is efficient screening of these investors being done to cope, and the money laundering and KYC obligations of our clients and ourselves. This is why we have large teams doing that in Ireland and Luxembourg and France.

James [00:07:20] Thanks for that, Sven. So, you mentioned wealth management is one of the channels that's sort of taking an interest, particularly in these products. Are there any other sort of organization types, asset manager types, who you think are going to be the primary beneficiaries from this trend?

Sven [00:07:34] Yes, actually, there are James, and this might be a bit to the downside of small asset managers because we especially see established general partners or asset managers, those with higher asset under management emerging as the primary beneficiaries. So, it's those being at the forefront of creating distribution channels for private wealth presently. Preqin has evaluated on that, for example, found out that the 10 largest funds typically in the hands of the large annual partners, counting for about 80% of total AUM raised in 2020, a pretty high number. And what we also see is that over the last decade, and maybe to explain a bit on the reason for that, it's those largest firms that have diversified further across markets, across sectors, across strategies. And this, of course, makes them especially attractive for investors seeking for diversified portfolios, especially also internationally diversified portfolios. Coming to asset classes, maybe we see those among the semi-liquid products quite equally weighted, making private debt a bit on the forefront with 33%, but then closely followed by infrastructure and private equity and the rest being made up by them, and real estate, and even some mixed strategies.

James [00:09:02] Well, thanks for that, Sven, and thanks for joining us today and sharing your insights on this topic, and thanks to everyone for listening. You can explore our research further by downloading the full survey report, Private Markets Driving Success in Volatile Environments, from our website statestreet.com.