Retail money is a massive untapped opportunity for private fund sponsors, but for the moment, it is difficult to tell where promise ends and progress begins.
The economic rationale is clearly there: of the $279 trillion of total potential client assets in the world as of last year, 64 percent, or $179 trillion, comes from individual investors. Yet less than 5 percent of individual investors’ assets are in alternatives, KKR co-chief executive Scott Nuttall pointed out during an investor day presentation in April.
Three key challenges remain that bar retail potential from turning into alternatives AUM: regulation, which can vary greatly by investor type and country; access to liquidity; and prohibitive layers of fees.
With regards to regulation, in the US, there was modest progress this year. The US Securities and Exchange Commission’s Asset Management Advisory Committee approved a suite of recommendations in September, including scrapping rules that keep retail retirement funds out of closed-end vehicles with 15 percent or more assets tied up in private equity, hedge or venture capital funds, and requiring “chaperoned access” of retail investors and uniform disclosure rules for such terms as “risk”, “fees” and “returns”.
These recommendations were non-binding and leave much of the regulatory work, including coming up with those term definitions, to the SEC, or the US Congress, to do, according to a senior lawyer with experience in the area. The recommendations, while reflecting the SEC’s interest in the matter, fall short of being a practical framework.
With regards to liquidity, firms are displaying creativity through strategic partnerships, often with fintech and pure-play financial services groups. Fintech platform iCapital Network, which has client assets totalling more than $75 billion, is asking for $25,000 to $50,000 for minimum investments in flagships of the likes of Blackstone, BlackRock, Pantheon and Hamilton Lane to accredited investors.
Investors on the platform of Europe’s Moonfare, which has the likes of EQT, Carlyle Group and Warburg Pincus on its menu, will be able to sell their fund stakes to Lexington Partners and other investors on the platform through a “formal process” held twice a year, PEI reported in January.
Nasdaq Liquidity Solutions, meanwhile, facilitates liquidity for diversified funds – like Macquarie Asset Management and Wilshire‘s Delaware Wilshire Private Markets Fund, which launched in June – for individual investors and more niche strategies like that of mid-market GP stakes Hunter Point Capital.
In the first week of December, US fintech unicorn Republic acquired European online investment platform Seedrs to create a transatlantic platform. M&A activity can be indicative of an inflection point, according to a partner at an international firm, as also may be the case with the secondaries market – which too has a role to play in providing retail liquidity solutions, according to affiliate title Secondaries Investor (subscription required) – as larger players start to grab real estate in advance of perceived paradigm-shifting growth. This is certainly a space to watch.
With regards to fees, multiple layers – whether from registered wealth advisers, fintech platforms or fund of funds managers – could see costs become prohibitive. Though, as solutions and products proliferate the market, many think the competition will result in lower prices, eventually.
While Partners Group got a head start with its 40 Act fund in 2009, providers now include Macquarie’s Delaware Wilshire and funds from StepStone Group, Hamilton Lane, Pantheon, KKR, Carlyle Group, Voya Investment Management and Liberty Street Funds. Competition, it seems, is well on its way.
To end, a word of caution for the would-be retail investor from Jeff Hooke, senior finance lecturer at Johns Hopkins Carey Business School, whose recent book echoes arguments made last year by Oxford University Saïd Business School professor Ludovic Phalippou: “Avoid private equity altogether.” Instead, pursue low-cost public indices that have performed just as well, if not better. “They’re going to get milked for fees, just like the big institutions are.”