The latest issue The Economist features a special report on Private Markets. This report provides broad historical context to the current boom in private equity, real estate, and other alternative assets. It analyzes the tailwinds that have driven record amounts of capital into private markets, and the risks and opportunities the industry is facing in the near future. Its a must read for anyone interested in alternative investments. As we’ve noted several times before- alternative investments have gone mainstream.
The article discusses how the pioneers of leveraged buyouts transformed and reinvented themselves into diversified alternative investment platforms with exposure to a wide range of assets. One section in particular focuses on how asset managers that traditionally focused on high end institutional clients are now focusing on marketing to mom and pop investors.
Quoting from the article:
The PE giants are hustling for high-end retail business from clients who count as “accredited” investors whom regulators deem sophisticated enough to buy private assets. The big firms are also strengthening private-wealth teams, in some cases poaching from banks. Alisa Wood of KKR says the firm is looking to raise a third or more of its capital from retail investors. Apollo expects individuals and advisers to invest $50bn over the next five years. To that end, in December Apollo acquired part of Griffin Capital, a Los Angeles -based fund manger. The next target is the “mas affluent”, or merely quite well off, who have little invested in private markets and want more. Several firms, including Blackstone and Brookfield, have launched or are working on PE, credit, property or infrastructure funds tailored to smaller investors.
Product Innovation to Meet Retail Needs
These new investment products cover a wide range of asset classes, and can come in a wide range of product wrappers. Interval Funds and Tender Offer Funds have become more common in recent years. Non-traded REITs and Non-traded BDCs are also important structures, especially for real estate and credit exposure. Regardless of the wrapper, asset managers need to innovate to create solutions that meet retail investor needs. Two important challenges are the need for liquidity, and the need for transparency.
One difficulty over turning this retail trickle into a flood is illiquidity. REtail investors want to trade in and out of investments at a reliable net asset value, if not daily then weekly or monthly. That is not easy to engineer with private assets. Some a the cutting edge are making headway. Swiss-headquartered PArtners Group manages over $36bn in open-ended PE funds for investors including wealthy retail clients. Investors receive monthly net asset values and can redeem ata 30-90 day notices(although funds can halt redemptions during market turmoil).
For more information about Partners Group and their massively successful closed end fund products, check out this article on TenderOfferFunds.com
Meeting retail investor needs is an essential part of the long run business strategy for all major alternative asset management firms. As the article notes:
The retail pus aims both to increase clients and to grow fee based revenues. This goes hand in hand with the objective of raising more “perpetual” capital. Not only are profits from traditional PE funds erratic, but also the funds have to be wound up, typically after ten years. Big firms want to move away from this here-today-sold tomorrow model. They like vehicles that can invest for longer, or are open-ended. , avoiding the need to go cap in hand to investors every few years.
A lot of alternative asset managers are publicly traded, and also need to consider how the public markets view fee streams. In general, asset managers with a higher percentage of base management fees from permanent capital vehicles will command a higher valuation.