Across earnings calls, board meetings and private markets conferences, the question of how exactly to attract more wealthy individuals into private equity has been pondered for some time. This year, real progress seems to have been made in building the facilities to access this capital at scale.
In February, Private Equity International embarked on a deep-dive exploration of how private equity firms are bolstering access to this lucrative – and rapidly growing – source of LP capital.
Apollo Global Management also launched its own global wealth platform, Apollo Aligned Alternatives, at the end of the second quarter. Based on early conversations with investors, chief executive Marc Rowan said in the firm’s Q2 earnings call that AAA has the potential to be “the largest fund across the Apollo platform by this time next year”.
Rashmi Madan, senior managing director and head of EMEA in Blackstone’s Private Wealth Solutions business, told PEI that macroeconomic concerns were increasingly driving high-net-worth individuals in Europe towards alternatives.
“Individual investors are concerned about their fixed income portfolio due to increasing rates. That is why they are looking to diversify into alternatives and private credit with floating-rate income which could benefit from a rise in rates.”
This dynamic should catalyse momentum that has already been growing in recent years. Research from private wealth law firm Boodle Hatfield, for example, found that UK private equity activity by high-net-worth individuals jumped to its largest amount in a decade in 2021, reaching £2.3 billion ($3.04 billion; €2.78 billion) – almost double the £1.2 billion recorded in 2020.
Appetites were driven by historically low interest rates and opportunities related to Brexit and the pandemic, as well as a desire to access private equity returns without paying management fees or carry.
“We see high-net-worth individuals investing alongside PE houses, as well as undertaking club deals,” Kyra Motley, a partner at Boodle Hatfield, told PEI. “That allows them to invest but avoid the cost of going through funds. We see that on a large scale.”
Quelling industry fears
Even for those who acknowledge the tremendous potential of this growing investor base, concerns still need to be addressed.
At Invest Europe’s Investors’ Forum in March, multiple LP delegates warned that there are serious risks to consider when opening access to PE to less sophisticated investors. Sofie Kulp-Tåg, senior investment manager at Skandia Mutual Life Insurance Company, for example, told PEI that reputational problems could come to the surface if too many uneducated individuals start investing.
“It’s a big risk for the industry,” she said, noting that investors not being able to fund their capital calls is a key concern. “You really need to make sure that investors understand the asset class and how long you have to stay in the game.”
Maggie Fanari, global co-head of high conviction equities and a managing director of the Teachers’ Innovation Platform at Ontario Teachers’ Pension Plan, said at the same event that education is key in this regard: as the majority of retail investors are new to the asset class, they must be given the requisite information on its unique processes and long-term horizons before making any commitments.
“It is about investor education, but at the same time also ensuring that retail investors have the same level of information as institutional investors,” Fanari noted. “What you really want to see is transparency and consistency of information across the board.”
Some of private equity’s biggest names have made real strides in democratising private markets investing this year. As progress in this area continues, market participants must ensure the proverbial floodgates are not being opened without due care or consideration.