Private equity retail investors are shopping around

Alternative asset managers are tapping the small investor market through new channels to increase AUM and diversify investor bases.

Blackstone, the largest private equity firm by five-year fundraising according to the 2017 PEI 300, recently entered a deal with three independent broker-dealers to launch a retail investing platform.

The New York-based firm, which managed $368 billion in total assets as of 31 March, signed agreements in April with three unnamed IBD firms to provide real estate and hedge fund products to retail investors, according to a source familiar with the matter.

This channel, the source said, could include private equity and other Blackstone products in the coming year.

The move comes at a time when several private equity players have been looking to give smaller investors access to their products. Once the gateway to the retail market is fully established, private equity firms could tap into a pool of trillions of dollars – the National Bureau of Economic Research estimates $42 trillion is held by the top 10 percent of US families, most of whom are not actively invested in the asset class.

Firms have approached the democratisation of private equity in various ways. For example, Zug-based Partners Group launched private markets offerings in December 2015 that allow defined-contribution retirement plans to include private equity in their portfolio mix.

Digital platform NextVest was formed in 2014 to attract accredited investors to participate in private equity investments on a deal-by-deal basis. Other firms are tapping retail through listed funds. Pomona Capital, for example, partnered with Voya Financial in 2015 to launch Pomona Investment Fund, which allows a minimum commitment of $25,000 – significantly less than traditional fund requirements.

Blackstone began exploring the idea of broadening its distribution nearly a decade ago. For the past five years, it has been bringing in capital from retail investors through major banks and brokerages in its private wealth management platform, according to the source. The firm has hired wholesalers and marketing teams to create bespoke, multi-asset products for these smaller investors.

“Our goal is to provide high-quality education to the advisors in the field and deliver excellent service after the investment is made,” Blackstone senior managing director and head of multi-asset investing and external relations Joan Solotar told Private Equity International.

During the firm’s first-quarter earnings call in April, Blackstone president and chief operating officer Tony James said the firm is selling about $9 billion a year through its retail and small institutions channels.

“The big growth area for Blackstone is going to be right there,” he said, adding that the firm is managing demand to create controlled growth.

Other private equity giants, such as Apollo Global Management and KKR, have also drawn in retail capital in recent years. KKR has a credit partnership in its IBD channel, and has raised more than $3 billion, or around 11 percent, of its total capital from retail investors, KKR head of global capital and asset management group Scott Nuttall said during its first-quarter earnings call in April.

There are three more IBD firms that Blackstone’s investment committee has approved but which have yet to sign agreements, the source added, noting the New York-based firm expects to bring the number of IBD firms to 30 for this retail channel in the next two to three years.

A private equity fund investor base that just a decade ago would have consisted mostly of large public pension funds could look very different in 10 years’ time.