New Investors

THE NEXT FRONTIER FOR PRIVATE EQUITY: INDIVIDUAL INVESTORS

High-net-worth individuals and retail represent a further stage of growth in private equity allocations. The largest fund managers are leading the charge, as regulators watch closely

Ten years ago, private equity giant Blackstone relied exclusively on large institutional investors for its capital. Last year, around 20% of its USD684bn AUM came from individual investors. It could reach around half in the next decade, according to the firm.

Co-founder Stephen Schwarzman believes retail is an USD80tn addressable market and other large private equity managers including KKR and Apollo are taking notice too.

According to a recent survey by consultancy Oliver Wyman, individuals are expected to allocate an additional USD 1.5tn to private markets by 2025.

“When we look at where the large funds are putting a lot of their focus and where they’re building new teams, it’s [the retail] investors that jump out,” says Peter Witte at EY. “It’s an untapped market and by and large, those markets have been kind of frozen out of institutional commingled funds for a long time.”

Banks, particularly in Europe and Asia, have been developing alternatives investment platforms to target the growth in private clients there. Fintech feeder vehicles from Moonfare (started by an ex-KKR executive), iCapital Network (partowned by Blackrock) and others are funnelling huge amounts of retail capital into the most well-known private equity funds. And, more recently, private equity funds are being ‘tokenised’ through blockchain to potentially allow investments for as little as a dollar.

In an environment of low interest rates where more and more companies are shifting into private hands, the owner of Moonfare claimed last year that there is a “political need to open up these markets”.

Regulators may have been listening. Last September, an advisory group for the US Securities and Exchange Commission (SEC) recommended making it easier for the less wealthy to invest in private equity. European authorities have also proposed changes to the European Long-Term Investment Fund (ELTIF) which will remove minimum investment and wealth requirements for individuals while also broadening the type of assets fund managers can hold.

Throughout the last decade, wealthy families have gravitated Are fund managers seeking to increase capital sourced from wealth management or retail channels?

7%

51% 42%

Yes No Don't know

Source: EY, Survey of fund managers, 2021

Public listing of alternative funds

Increased marketing to retail investors directly including advertising and sponsorship

Listing funds on ntech platforms that aggregate individual retail investors

Informal networking through existing clients

Listing funds on bank wealth platforms and investment adviser networks directly

Source: EY, Survey of fund managers, 2021

Made with

away from hedge funds to private equity and venture capital, in particular.

They are generally considered to be more comfortable with entrepreneurial risk and evaluating management teams and want the higher returns on offer in VC. This has also put them at risk of overconcentration in their area of expertise, say their advisers.

Yet from the perspective of fund managers, they are also a diverse group with a wide set of differing objectives. “All have distinct investment objectives and time horizons. It gets granular very quickly,” writes Jan Philipp Schmitz, Ardian’s Head of Germany and Asia, in an article on the company’s website. In the past 12 months, there has been a sharp drop-off in family offices’ use of funds-of-funds, while involvement in funds and direct investments has risen significantly, according to UBS’ Global Family Office Report 2021. More than three quarters (77%) now make expansion or growth equity investments.

Netting flows

In October, BlackRock partnered with Credit Suisse to launch the first in a series of private equity vehicles targeting individuals in the private wealth market. But rather than a traditional tech and heathcare buyout strategy, they chose an impact fund focused on health and wellbeing.

Wealth managers have traditionally cited a lack of appropriate vehicles, regulation and higher costs as barriers to high-net-worth individuals investing in private equity. The same is also true for retail investors – seen as a more fractured and less transparent marketplace.

“Over recent years one of the biggest trends we’ve seen in the way private clients approach private markets has been the development and uptake of semi-liquid vehicles and greater specialisation in certain segments,” says Simon Jennings, managing director at HarbourVest.

“Large pools of private client’s wealth historically held back on concerns of long lock-up periods have been driving innovation in this area. Private banks and wealth management firms have been trying to find ways to crack this nut for some time and we are starting to see One of the biggest trends we’ve seen [among] private clients has been the development and uptake of semi-liquid vehicles and greater specialisation in certain segments

a proliferation of new ideas which create monthly or quarterly liquidity mechanisms for clients to meet this demand.”

These new ideas include the ‘tokenisation’ of a private equity fund by Partners Group in Singapore last year, vehicles with monthly or quarterly subscriptions and redemptions, and listed vehicles, such as investment trusts, where investor decisions to buy or sell holdings doesn’t prompt the trust to sell portfolio investments.

Blackstone has traditionally targeted individual investors in the USD1m to USD5m range due to their under-representation in the alternative investment arena. It is a group that represents around USD30trn or 44% of the global individual investor market, says the firm.

With individuals investing less than USD1m, the market expands further. Yet many smaller GPs are still reluctant engage with such investors because of the administrative burden involved.

Larger private equity funds, especially those with bulging sales teams and technology platforms or partners, have an obvious advantage.

“[Retail flows] are inevitably targeting the brand name managers because a known name is reassuring,” says Andrew Bentley, partner at Campbell Luytens. “If you want an index, you go for a brand name. So the middle market, lower middle market, sector funds and emerging managers all have to work harder, and be better, to compete against this flood of money that’s predominantly going to listed houses.”

Hard work

Scale is an advantage, says Witte at EY, but he is also seeing GPs continuing to focus on the institutional market. “I think the direction of travel is just for the larger firms to sort of lead the way on this stuff,” he says.

A growing set of managers are turning to fintech allocation platforms not just for the new customers but also to aggregate demand and address anti-money laundering and know-your-client responsibilites, according to EY’s 2021 Global Alternative Fund Survey.

Of course, while the end game may include billions of dollars of new capital flows into private equity funds, subsequent changes in regulation may be a double-edged sword, say fund managers.

Closer scrutiny of private equity funds (large and small) by regulators is expected to follow an increase in retail interest and greater standardisation of fee structures and returns will ultimately be demanded too.

Many of the wealthy individuals turning to the private equity market over the past two years may not care.

“It’s quite a bull market phenomenon,” says Bentley. “In prior ‘up cycles’, retail investors have been quite a fickle part of the allocator market, individuals tend to be quite highly levered and just turn the tap off in more difficult times, unlike the institutions.”

WEALTH WHISPERERS

Large-cap private equity firms have been buying up wealth management and advisory firms to get closer to the trillions of dollars of untapped allocations held by high-networth investors.

Last year the number of private equity deals for registered investment advisers increased by more than two-thirds from 2020. They included Apollo’s agreement to purchase US wealth distribution and asset management arm of Los Angeles-based Griffin Capital, TA Associates’ investment in the advisory group Caprock and KKR buying half of USD 20bn Beacon Pointe Advisors.

In June, BlackRock expanded its partnership with fintech platform iCapital Network with plans to launch a series of private markets funds targeting wealth managers. A private credit strategy using iCapital’s AIFMD-compliant feeder fund structure will be followed by a series of funds focused on private equity and real assets, potentially based in impact investing, said Blackrock in reports at the time.