Rise of the high net worth investor

Family offices make up some 8 percent of the $4 trillion invested in private equity across the globe, up from 4 percent five years ago, according to research from Palico.

During that time, family offices and high net worth individuals with more than $10 million to invest increased their average private equity allocation from 19 percent to 29 percent of their own portfolio assets.

Blackstone recently told investors that it had raised 13 percent of its capital over the past year from wealthy individuals to help boost its dry powder to $82 billion.

While the bulk of the capital allocated to the $17.5 billion Blackstone Capital Partners VII vehicle still comes from pensions and retirement system managers, high net worth retail investors have played a growing role in the firm’s last three private equity funds. The firm raised $2.1 billion from retail investors for its fifth, sixth and seventh buyout funds, according to sources familiar with the situation.

“The private equity firms are interested in the individual personal retirement market because there’s more than $7.4 trillion held in IRAs, and $146 billion of that is self-directed. It’s a category that grew 21 percent last year, and they’ve realised there’s a huge under allocation taking place in funds that don’t access this market,” says Kelly Rodriques, chief executive of PENSCO Trust Company and a former operating partner at Washington’s Ignition Growth Capital.

Rodriques says individual investors are keen to tap into the double digit return potential of private equity. PENSCO serves as the custodian for self-directed IRAs that allow its holders to invest in private equity limited partnerships.

According to Rodriques, fee compression and emerging fund manager interest in the promise of capital offered by retail investors is also driving interest in the capital of 401(k) and IRA accounts.

For now, most buyout groups are targeting individuals that are qualified as accredited investors or individuals who have a minimum net worth of more than $1 million, or have generated over $200,000 in income for two years prior to making an investment.

Typically, investors commit anywhere from $50,000 to $250,000 per investment to access private partnerships.

The pairing of high net worth investors together with buyout fund managers, typically large cap funds, tends to be done by private bankers at Wall Street banks which establish investment vehicles known as “feeder funds” to allow individuals to invest in the limited partnerships of private equity firms. While private wealth management bankers will remain the dominant players in this business, other conduits are also connecting GPs and high net worth investors.

“This is a moment where funds who otherwise wouldn’t need our help raising capital are saying, ‘This is an opportunity we can’t pass up,’” says James Waldinger, chief executive of Artivest, a New York digital matchmaking platform for GPs and high net worth investors. “It’s a nice efficient way for them to raise a chunk of capital for their funds from a diverse investor base.”

If there was any doubt about Artivest’s ability to funnel retail money into private equity funds following its formation three years ago, that was put to rest last year. KKR, for example, tapped Artivest’s feeder vehicle to round out one of its energy funds at $2 billion in March 2014. The growing promise offered by income from wealthy individuals enabled Artivest, in turn, to raise $15 million of its own growth capital from KKR and other investors including RRE Ventures, among others.

Waldinger said the growing capital-raising trend is moving downstream to the mid-sized private equity sponsors. “We’re seeing many middle market funds starting to enter this space,” he adds.