No dice without liquidity

Private equity still hasn’t found a route into retail money. Will it ever?  

Dog bites man. More rain over England. Private equity house pulls retail offering. 

OK, the last item doesn’t really fit into this sequence of underwhelming news headlines. Though at least it has some scarcity value: in private equity, marketing efforts aimed at small-time savers are still rare. 

But we also know that the ones that have occurred have largely failed, and so this week’s revelation of KKR’s decision to stop promoting two retail products wasn’t exactly a shocker. More curious perhaps might seem the fact that the firm, which like many of its big-name peers appears to have zero difficulty in raising vast amounts from institutions, should have bothered with the products in the first place.

They weren’t strictly private equity. The Alternative Corporate Opportunities Fund (ACOF) and the Alternative High Yield Fund would have been housed in KKR’s debt business and invested in a mix of securities including corporate credit, high yield bonds, convertible paper and preferred stock. Alas, the general public didn’t want in. 

KKR has been coy about explaining what went wrong. Sources close to the firm have pointed to a “design flaw” (apparently purchasing ACOF would have meant going through an onerous vetting process). They also said that there wouldn’t have been the “daily liquidity most mutual investors expect”. 

It seems likely that the latter problem was the chief reason for ACOF’s downfall. When it comes to accessing retail money, lack of liquidity is private equity’s Achilles’ heel. For most investors, be they tiny households or giant pension funds, investing in a structure whose underlying assets take years to generate returns is a big ask. What makes it even harder for the households in particular is when the shares in said structure aren’t traded in sufficient volumes to allow for easy liquidation. KKR’s ACOF and also the high yield product would probably have had this limiting feature.   

Indeed, the liquidity problem is why some fundraising strategists in private equity have given up on the idea that there can ever be a viable route to retail capital. At EVCA’s recent Responsible Investment Summit in Brussels, a practitioner panel explored whether private investors could and should be enticed into the asset class, and who would benefit if they did. It was striking how forcefully a number of GPs in the audience argued against the idea. Retail investor will never get over the liquidity issue, was their argument, and if they do, regulators will be hard on their heels and hit the industry with yet another layer of cumbersome compliance rules. Let’s just not go there, the naysayers pleaded.  

KKR, meanwhile, is taking a different view. Sources say that of the $21 billion it has raised over the past 12 months (!), roughly a quarter has come from ‘individual investors’. One assumes that these are largely high net worth investors with the wherewithal to handle conventional limited partnerships. They are no ordinary high street savers. That aside: “We are adjusting our product mix and packaging on the Schwab platform and we have a number of other offerings for individual investors, including private equity, under development for launch this year,” the firm said in a statement this week. 

So KKR is unperturbed. So are other would-be trailblazers such as Pantheon, which are currently working to solve the puzzle of how private equity can get its hands on the monies going into defined contribution pension schemes. This too is a challenge that requires solutions around liquidity and daily pricing. 

Perhaps product innovation and clever structuring really will pave a way for the industry into retail. While we wait to find out, savers do have other listed options. 

The S&PListed Private Equity Index is made up of many of the world’s leading alternative asset managers, including Carlyle, Blackstone and indeed KKR. A dollar invested here a year ago would have returned a 24 percent gain, more than 100 basis points better than the S&P 500. And anyone not satisfied with the result could easily have traded out of the index at any moment. With this kind of listed private equity, given the very large market caps of some of its constituents, liquidity is less of an issue.