Institutionalising access to the private wealth market is the holy grail for some of private equity’s biggest firms. Individual investors, wealthy families and high-net-worth clients remain a comparatively untapped source of capital in a market.
Blackstone has shown it can be done on a large scale. The US private equity giant expects to raise around $15 billion of private wealth capital this year through its private wealth solutions business, Joan Solotar, who heads the division, told Private Equity International.
The unit has more than $60 billion of assets under management and typically contributes 15 percent of each flagship vehicle raised.
Switzerland’s Partners Group is another increasing its exposure to this investor base. Distribution partners and private individuals accounted for 16 percent of its €67 billion of total AUM as of 30 June, up from 14 percent at the end of last year, according to its latest interim report.
Individuals can access private markets in a number of ways. Blackstone, for instance, has around 10 products that are bespoke for each client. These include non-traded real estate investment trusts, a floating-rate income fund and daily liquidity hedge funds. It is also developing another private equity offering it anticipates will launch within the next 12 months.
Partners Group has its €780 million London-listed Princess Private Equity trust, which makes fund commitments and direct investments, in addition to a number of other private markets products open to HNWIs. Its US-based Private Equity Master Fund, which invests alongside other Partners Group vehicles, had $3.5 billion in net assets as of 30 June, according to Securities and Exchange Commission filings.
The impressive sums raised by the two firms bely the difficulty of raising private wealth capital. Doing so is time- and resource-intensive; navigating regulation, due diligence and liquidity requirements are among the largest obstacles for those making the jump.
Roughly two-thirds of Blackstone’s $15 billion private wealth haul this year is expected to come from US investors. The domestic market – while also the largest – is the easiest for private equity managers to access; anyone with at least $5 million in assets including their main residence is considered a professional qualified purchaser.
Marketing overseas is where the process becomes trickier. Although Asia has a similar qualified purchaser rule to the US, the EU has various protections in place, such as requiring those who want professional investor status from their bank to complete 50 securities trades each year.
“In the EU, a professional investor is not something you can just decide to be because you’re very rich,” Pilar Junco, a senior managing director who leads Blackstone’s PWS unit outside of the US, noted. “There are very wealthy people out there that could have built a fortune in supermarkets but are left out because they can’t be classified as a professional investor under European investment rules.”
Certain countries, Germany, the UK and Denmark included, allow clients to be registered as semi-professional if they are deemed a sophisticated investor, which can take into account whether an individual makes a certain number of trades at work among many other factors.
The challenge for Blackstone, Junco says, is ensuring the institutions they partner with – given that high-net-worth clients often invest through a private bank feeder fund – are marketed to the appropriate clients.
Private banks play an important role. Those with which Blackstone has a relationship are afforded feeder funds that may have exclusive access to one of its funds for a limited period of time. If the firm is raising a flagship real estate vehicle, for example, Bank A may be given three months for its clients to invest in a feeder pot before it moves on to Bank B.
Building relationships with these institutions takes work. Retail advisors are not always familiar with the intricacies of private markets, meaning firms such as Blackstone need to spend time on the road educating the intermediary on the fundamentals of alternative assets and the various liquidity options available before meeting with its clients.
“Typically there would be a longer hockey stick ramp; much slower at the beginning when you’re in the real education process, and then once it gains traction it starts to move a little bit more,” Solotar said.
“What they’re really asking for is how these fit in an overall portfolio and to make sure there’s transparency on the backend in terms of regular updates and good reporting – so it’s really soup to nuts.”
Having such a granular investor base brings additional challenges. Blackstone, for instance, must comply with all applicable anti-money laundering and similar regulation in each market, ensuring the capital invested by private banks and IFAs does not have criminal or unsuitable political links.
“Oftentimes firms will use a checklist to perform due diligence, but we actually want to go on site and meet the compliance people to understand their process and really see what they’re doing,” Solotar adds.
Private equity is a long-term game. Unlike state pensions, giant insurance companies or sovereign wealth funds, retail clients often don’t have the luxury of tying up huge sums of capital for the duration of a typical fund.
“Many high-net-worth clients feel cash is important to them because they’ve seen difficult times,” Junco said. “In some countries the average age could be above 65, [and so these people] really feel that this is their security.”
Traditional private equity funds might only offer to repurchase units from investors on a quarterly basis. Retail vehicles must be able to value their assets more frequently in order to provide clients with greater liquidity.
Blackstone keeps around 30 percent of its real estate invetsment trust capital in liquid assets such as commercial mortgage-backed securities, enabling it provide 5 percent liquidity to investors who want to get out each month.
PE to the people
Raising capital from private wealth at the scale of Blackstone and Partners Group is unlikely to become the norm any time soon. But recognition of the growing demand from such investors is heightening, and the complexity of raising capital in this way makes the area ripe for disruption.
Hong Kong-based Privatemarket Technologies, for instance, is a distribution platform for alternative investment funds which collects and commits capital from family offices and accredited investors that cannot reach a fund’s minimum ticket size. Its staff includes alumni from family office advisory Suffren, real estate investor Engelhard and UBS.
While the firm has invested just $100 million across seven funds since 2016, its clients have around $2.3 billion available to invest in private equity. The concept, though nascent, has potential.