In this exclusive article, Chloe Mercer, co-founder and COO of Private Markets Alpha, shares her expert insights on friction risks in private markets.
The investment industry’s approach to private markets for more than a decade has been largely simple – broaden access, tap into the vast pool of wealth capital, and ‘democratise’ an asset class long dominated by institutions.
Yet despite structural innovation, regulatory evolution, and growing appetite from wealth managers, one constraint continues to quietly undermine progress. It is not performance, product quality, or even education that most consistently derails distribution. It is onboarding friction – the operational reality of getting investors through the door.
At the centre of this friction sits the traditional AML/KYC framework. Designed for robustness and risk mitigation, these processes have historically operated on a per-investment basis. Each new allocation triggers a reset: subscription documents, identity verification, source-of-funds checks, and layered compliance reviews. For institutional asset managers, this is manageable. For wealth channels, where capital is fragmented across hundreds or thousands of underlying clients, variations in the specifics of advisory and discretionary account mandates and individual custody or platform arrangements complicate the addition of private markets to client portfolios at scale.
Wealth managers face an operational burden that scales linearly with client volume, while private markets-focused fund managers lack the infrastructure to handle that complexity. In effect, the cost of onboarding erodes the economics of distribution, which is not merely an inconvenience but a structural barrier to access.
A misaligned paradigm
Compounding the issue is the industry’s longstanding reliance on supply-led product design. Fund managers typically build products first – optimised for strategy, regulatory jurisdiction, and internal economics – then attempt to distribute to wealth channels. However, there are a number of negative consequences of this approach.
- Mismatched structures: products that do not align with tax wrappers, liquidity expectations, or regulatory constraints of target investors
- Wasted cost: significant upfront spend on structuring vehicles that ultimately struggle to scale
- Distribution failure: limited uptake despite strong underlying strategies
Even when demand exists, the operational friction of accessing the product often deters participation. In short, the industry has optimised for manufacturing rather than accessibility.
The solution is clear. Onboarding should no longer be a back-office consideration but accounted for as a frontline distribution risk. Wealth managers increasingly evaluate private market opportunities not just on return potential but also on execution ease.
Can the product be onboarded efficiently? Does it integrate with existing custody and reporting systems? Is the client experience comparable to public market instruments? If any answer is no, capital flows elsewhere. This dynamic helps explain why many private markets-focused managers, despite strong performance, struggle to appeal to broader audiences.
Solutions are emerging
In response, two distinct approaches are emerging to address onboarding friction and unlock scalable access.
Model 1: the custodian-integrated framework
This model focuses on integration rather than reinvention. Instead of duplicating AML/KYC processes, it leverages existing custody and onboarding frameworks already maintained by wealth managers. Client verification is performed once at the custodian level and reused across investments.
By operating as an orchestration layer rather than a replacement system, these frameworks minimise disruption and significantly improve efficiency. Crucially, they shift onboarding from a repetitive process to a reusable infrastructure. For wealth managers, this translates into scalability, while for fund managers, it enables access to aggregated capital without operational overload.
Model 2: proprietary tech stacks
This emphasises the development of new, end-to-end digital onboarding systems, in which platforms aim to streamline AML/KYC through automation, digital identity verification, and centralised data management. While, in theory, this offers a seamless, fully digitised investor journey, in practice, some challenges persist, including adoption friction, integration gaps, data duplication, and the risk of introducing fragmented, off-platform workarounds.
However, despite their technological sophistication, these solutions can underestimate the inertia of existing systems and the importance of ecosystem alignment. There is a danger that tools designed to reduce friction can inadvertently introduce new layers of it.
Harnessing the flow
The market’s recent response to this architectural shift suggests that infrastructure, rather than product supply, has indeed been the true bottleneck for wealth managers. In our own experience at PM Alpha since launching commercially in Q3 2023, deploying a demand-led, custodian-integrated framework has allowed us to cross $3 billion in contracted AUM, connecting over 9,000 individual wealth investors to institutional strategies through the brokerage and custody rails they already use daily. This case study demonstrates that when the industry changes the delivery mechanism, private market access successfully transitions from a theoretical possibility to an operational reality.
Infrastructure versus interface
The divergence between these models highlights a broader industry shift from interface innovation to infrastructure optimisation. Early efforts to democratise private markets focused heavily on user experience – such as portals, dashboards, and digital subscriptions. While important, these improvements addressed the surface rather than the root cause. The real constraint lies in the plumbing of onboarding, custody, and compliance.
However, onboarding cannot be addressed in isolation. It must be part of a broader transition toward demand-led product design. This means engaging wealth managers early to understand structural requirements, designing vehicles that align with regulatory, tax, and portfolio constraints, and embedding onboarding considerations into product architecture from the outset.
Private markets stand at a critical juncture. The opportunity to access wealth capital is vast but realising it depends less on innovation at the margins and more on fixing the fundamentals. The firms that succeed will not be those with the most sophisticated products, but those that make access effortless. In the end, democratisation is not just about who can invest, but also about how easily they can do so.
