The second obvious dimension is the regulatory pressure under which investors operate, which itself is partially determined by the geographical location of investors (and thus the jurisdiction they depend on). The lowest regulatory pressure is probably on family offices and HNWI. Regulations are essentially set up to protect investors, but there is no specific requirement that they have to follow when allocating their assets and deciding where to invest. They are essentially unconstrained by regulations. SWF come next, with low to no regulatory pressure. Due to a lack of transparency, it is difficult to establish precisely the level of regulation they have to comply with. Endowments and foundations are lightly regulated. Most of the constraints come from their legal status as charitable institutions (or equivalent) and their tax exemption. In some jurisdictions, this implies the undertaking of specific actions. In the US, for example, university endowments have an obligation to spend a certain percentage of their total asset value every year. Pension funds, insurance groups, and banks have to comply with a high level of regulation. In Switzerland, for example, pension funds are not allowed to allocate more than 15 percent of their assets to alternative investments. In Europe, insurance groups and banks have to respect specific rules about their solvency and how to account each asset class they invest in using these solvency rules.
Although less obvious, the third parameter is the size of assets under management. Investing in private markets is an activity that is not easy to scale. This determines the asset allocation and the portfolio structure of investors. Small investors cannot easily replicate the asset allocation of larger ones (and vice versa).
A large size can have positive consequences. Dyck and Pomorski (2012) explain that Canadian pension funds with significant holdings in private equity perform better (740 basis points) than the ones with a smaller exposure, due to cost savings (25 percent of the gains) and superior gross returns (75 percent of the gains) that the authors attribute to the ability of investors with a larger exposure to «bridge the significant information asymmetries between investors» and fund managers. A large size can also have negative consequences. Large investors suffer from inertia (they respond more slowly to market changes) and suffer from higher home bias (Hobohm, 2010). This also leads to portfolio concentration, notably in large LBO funds.
Investors with lower assets under management can diversify more easily, notably in niche strategies. Their small size limits them in their ability to diversify geographically (lack of reach), as well as in terms of access to private market funds (the minimum threshold to invest in funds can be rather high). They do not benefit from economies of scale and lower costs. Smaller investors have been addressing some of these drawbacks. An easy way is to invest through funds of funds, although this adds to costs and prevents a tailored exposure. Another, assuming a sufficient amount to invest, is to set up an investment mandate, which provides a tailored exposure at a lower cost. However, this solution requires $25 to $35 million to invest in private markets and still adds up costs. Investors can also join forces to set up a joint consulting firm, as non-profit organizations did in the US with The Investment Fund for Foundations (TIFF Investment Management) in 1991.