The rise of the individual investor:
Collateralised fund obligations
For private equity mega-firms, retail investors – individuals without the means to invest large sums of capital – mark the next logical step in the pursuit of more assets to manage. Blackstone and HarbourVest are among those making eyes at this promising market.
How best to tap into this capital remains something of a mystery. Many of the products available to individuals are a far cry from traditional private equity and are little help in expanding a manager’s limited partner base or AUM.
Publicly traded managers are a prime example. While an influx of cash from an initial public offering would be welcome for most GPs – Hamilton Lane used some of its proceeds from listing to repay a term loan in 2017 – new shareholders are not participants in its funds and therefore do not generate fee income, the bread and butter of asset managers.
This is also true of most collateralised fund obligations, which sees an existing LP sell equity or, in the case of Temasek, publicly traded bonds secured against a portfolio of fund stakes. A move like this is of little to no benefit for the GPs in the underlying portfolio, rather, it provides liquidity for the LP and offers retail investors a taste of the cashflow usually enjoyed by institutional players.
For GPs hoping to directly bolster their AUM with capital from the retail market, the options remain limited.
The listed private equity industry – now 40-vehicle strong – has not yet reached its full potential. While the opportunity to access upside either from assets directly held in the trust or through commitments to private equity funds make trusts an appealing prospect for individuals, GPs may be frustrated by a lack of appetite from large public markets investors who need to be able to put more money to work. This means the shares don’t have enough liquidity and leaves portfolios trading at discounts.
Some firms have identified the rapidly expanding defined contribution segment as ripe for the picking, but that is easier said than done. Daily pricing and liquidity requirements mean the resulting products are more akin to mutual funds rather than pure PE. Returns are muted as a result and regulatory charge caps – 0.75 percent in the UK – mean fee income is limited even if its performance excels.
As it stands, no firm venturing into this nascent market can do so without compromise, though there is undoubtedly potential to grow AUM in the defined contribution space. Those capable of negotiating its many intricacies are likely to be well-rewarded.
– Rod James contributed to this report.