The race for the retail investor is on. And to paraphrase an old movie title: they can get it for you retail.

It’s not as if alternative managers that cater to large institutional investors and family offices are not already established in the market for individual investors, through publicly traded shares of their own firms and business development companies. And high-net-worth investors have long been able to access alternative investments such as non-traded real estate investment trusts and master limited partnerships through wealth managers and private banks.

But in the past year, a confluence of factors have turbocharged managers’ efforts to capture a bigger share of the trillions of investment dollars held by the moneyed masses. US regulators have widened access to instruments such as non-traded BDCs and real estate investment trusts by expanding the definition of accredited investor. Last autumn, European regulators issued proposals that would enable more “mass affluent” investors to access the private capital markets through long-term funds by removing the minimum €10,000 investment threshold, among other things.

More recently, London Stock Exchange Group submitted plans to UK financial authorities to establish a market that would allow privately held businesses to list and trade their shares within a given window, to address the illiquidity issues embedded in such investments. And digital wealth platforms such as Yieldstreet, iCapital and Moonfare are expanding access to retail investors either directly or through registered investment advisers.

“Relative to institutions, individuals tend to be under-allocated to alternatives”

Akila Grewal
Apollo Global Management

All this comes against the backdrop of historically low interest rates and increasingly volatile public fixed income and equity markets, which have been whipsawed as the US Federal Reserve and other central banks begin to transition to a higher rate regime in response to concerns about inflation and a tighter labour market. That has increased the appetite among investors of all stripes for higher yielding, private credit investments.

“If you look at where investors are currently invested in the US – the municipal bond and fixed-income markets at $3 trillion each – neither is protected in an inflationary environment, and neither provides much yield,” says Joan Solotar, global head of private wealth solutions at Blackstone. For alternative asset managers, “the opportunity set is large”.

Indeed, the global wealth management market “has grown massively in the past few years, with increased wealth created and generated by millionaires and billionaires”, says Kenny King, head of alternatives in BNY Mellon’s asset servicing business.

Nevertheless, “relative to institutions, individuals tend to be under-allocated to alternatives”, says Akila Grewal, a managing director at Apollo Global Management. Although institutional and high-net-worth investors’ allocations to alternatives increased to $10.7 trillion in 2020, high-net-worth individuals allocated just 3-5 percent of their portfolios to private markets, according to a report by BNY Mellon and Mergermarket. But with the global alternatives’ industry expected to reach a whopping $17 trillion by 2025, even a small increase in the percentage allocated by high-net-worth investors to private markets would represent a significant amount of capital.

Upping the pace

Retail investors are picking up the pace. Global asset management strategy consultant Casey Quirk, a Deloitte business, sees retail assets under management in the alternatives market rising 8.5 percent in the next few years, compared with just 4.7 percent for institutions. Notably, retail holdings of private credit products are predicted to jump 12.9 percent by 2025.

The increased investment dollars from the retail channel will help diversify asset managers’ investor base, as the institutional market continues to mature. Institutional investors “appear largely satisfied” with their current allocations to alternative investments, with private debt and private equity tied for the lead at about 24 percent each as of 2019, according to the BNY Mellon report, which surveyed 100 institutional investors and 100 alternative asset managers. The good news is that the market for individual investors dwarfs that of institutions. Apollo, at its investor day in October, estimated the global market for high-net-worth and mass affluent investors at $178 trillion, far higher than the institutional market’s $102 trillion.

Small wonder, then, that the biggest managers have been bulking up their private wealth platforms to snag some of that capital, with a dizzying series of moves. Just last autumn, Ares Management, the largest private debt manager by assets, assembled a 90-person wealth management solutions platform, after buying Black Creek Group, a distribution and advisory firm that will help Ares expand its nearly $50 billion of retail AUM as of 30 September last year.

Blackstone announced in October that it plans to double its private wealth staff to more than 300, including a big investment in Europe, by the end of next year. That is probably due in no small part to the success of its Blackstone Real Estate Investment Trust (BREIT), the firm’s first non-listed REIT, which was launched in 2017. That fund has since raised more than $50 billion.

With BREIT, Blackstone “raised a ton of assets and knocked it out of the park”, says Scott Gockowski, a senior manager with Casey Quirk. “Blackstone opened the eyes of people about the size of the opportunity.”

Then in January 2021, Blackstone launched the first perpetual life BDC, Blackstone Private Credit, or BCRED, which has already raised $14.1 billion through December. Sources familiar with Blackstone’s products say the firm designed BCRED and BREIT with fees and expenses intended to be well below the average public BDC or REIT, with the aim of passing on more returns to its investors.

Blue Owl Capital quickly followed suit with the Owl Rock Core Income Fund, a non-traded, multi-share, evergreen fund that has raised $629 million through Q3 2021, and has more than $34 billion in AUM.

Last autumn, KKR said it expects to increase capital from the private wealth channel to between 30 percent and 40 percent of new capital raised over the next few years from the current 10-20 percent, with co-chief executive Scott Nuttall calling the individual investor channel an area of significant growth.

Not to be outdone, Apollo in December agreed to buy the US wealth distribution and asset management businesses of Griffin Capital, part of a strategy it outlined at its investor day to raise a cumulative $50 billion of capital in the next five years for its global wealth business. Apollo chief executive officer Marc Rowan said the acquisition “will significantly advance” its growth plans in the US wealth market.

On the heels of the Griffin deal, Apollo launched a non-traded BDC for mass affluent investors, Apollo Debt Solutions BDC, with more than $1 billion of assets, and invested in CAIS, a platform that will give it greater access to mass affluent investors through independent financial advisers.

Carlyle, which like many managers offers public BDCs, has an unlisted interval fund called Carlyle Tactical Private Credit Fund, with $1.2 billion under management as of 31 December. It announced in February that it was teaming up with fintech platforms iCapital and Allfunds to expand its private wealth management channel.

And that is just for starters. HPS Investment Partners launched its first non-traded BDC in February, HPS Corporate Lending Fund, and there are more perpetual-life BDCs in the US in the works, according to the research arm of Stanger. These include Owl Rock Technology Income Corp, Oaktree Strategic Credit Fund and Bain Capital Private Credit.

In Europe, Tikehau last spring partnered with French insurer MACSF Group to introduce a unit-linked life insurance product that enables individuals to invest in the private debt of French and European SMEs, an investment that Frédéric Giovansili, deputy chief executive officer of Tikehau, says presages a growing trend in the EU. “States have been very supportive and are very keen to use private finance as a way to support the long-term growth of European companies,” he says. The two firms say the product would give investors “a high degree of visibility of the evolution of their savings and liquidity at all times”.

The liquidity issue

One of the stumbling blocks for less well-heeled retail investors is the lack of liquidity in these funds relative to a publicly traded investment. The structure of the funds will dictate when and how much access investors will have to their money, and many registered funds offer to repurchase as much as 5 percent each quarter. But if you read the fine print, some funds are not required to do so, and in many cases repurchases are subject in part to available cash and may be suspended or terminated at any time.

For example, for tender offer funds, “there’s no real guarantee of liquidity. It’s at the board’s discretion”, says John Mahon, a partner at law firm Schulte Roth & Zabel in Washington. And because a lot of these vehicles – both interval and tender offer funds – need liquidity to provide money for periodic repurchase offers, “their ability to borrow under a facility might be challenged if credit markets seize up”, he says. During an extended period of dislocation, “if everyone is trying to run to the gates, it’s not a great scenario”.

Although managers are pitching these strategies as a way to “democratise” access to previously exclusive, private investments, others question whether the efforts are truly democratic, and appropriate to the retail market.

“The secret to institutional success has been the outperformance of alternatives with reduced risk,” says Marc Lipschultz, co-founder of Blue Owl Capital. But he says that is often not what is marketed to individuals. “A lot of people are taking recognised brands and offering a product in the same asset class that doesn’t actively share in the same investments and dealflow of their institutional products.”

Some are sceptical of the outperformance plug. “People just want to believe,” says Jeffrey C Hooke, a senior lecturer in finance at Johns Hopkins Carey Business School and author of The Myth of Private Equity. He says fund managers have “cultivated a mystique around private investments; that it’s a lot more fun to invest in them”.

But he cites academic studies and other data to assert that “the pillar” on which the private equity industry has raised hundreds of billions of dollars – that private investments outperform public ones – “is just not true”. Moreover, he says, return statistics “are scattershot; there’s no simple table where you can look these up” and compare them to other benchmarks.

Others also take a cynical view. “When you’ve fed on every pocket imaginable, retail is the last place you’ve got to go,” says Dan Zwirn, chief executive officer and chief investment officer of Arena Investors, an institutional-only asset manager. The selling point of these products is, “I’m getting something the institutions are getting; the fact that it’s private means the reported net asset value can be managed, versus having a public stock price like a BDC”. And the big up-front charges associated with many of these investments “puts more pressure on the managers to produce the yield”.

Some argue that investors who want to access the private markets are better served by going the public market route. That is where “ordinary investors are put on the same footing as institutional investors and can access the necessary information to make informed decisions”, says Tyler Gellasch, executive director of Healthy Markets Association, a non-profit focused on improving capital markets transparency and reducing risks and costs for investors. “The problem with private markets is that those rules don’t apply.”

Hooke, a former private equity executive and investment banker, adds: “Institutions with a higher level of sophistication are able to more critically examine marketing claims that are put forth.” Retail investors do not have that sophistication, and “you can’t expect financial advisers to lift up all the
rocks”.

Others disagree. “The learning curve has been pretty much conquered, and most financial advisers have a good understanding for what the assets are and the platforms they’re investing in,” says Kipp deVeer, head of the Ares Credit Group.

He says that demand from individual investors for these products continues to increase, largely as a result of the low-rate environment. Although he notes that non-traded instruments offer less correlation to the public markets and lower volatility, he acknowledges there is less liquidity in a non-traded BDC product than a public one.  “Some investors will prefer the liquidity provided by a large, publicly traded BDC, but other buy and hold investors may prefer non-traded BDCs,” he adds.

Brad Marshall, head of North America Private Credit at Blackstone, notes that the BCRED portfolio is “very defensive, with loans that are senior in the capital structure and floating rate”.

Moreover, he says “there are protections that people may not appreciate that are built into the model” for private registered BDCs, including leverage limitations, asset diversification, quarterly and annual disclosure, and protections against financing Blackstone-sponsored deals.

Ken Kencel, president and chief executive officer of Churchill Asset Management, says that “direct lenders generally have more access to private information in their diligence process, including industry and market studies, consultants’ reports and accounting reports (in most cases provided to them by the private equity sponsors)”.

He notes that private credit managers “are largely buy and hold investors… we’re in the storage business; we like the loan and we’re going to hold it”.

Here come the regulators 

Whatever the case, tighter regulation is on the horizon. Just last month, the US Securities and Exchange Commission proposed sweeping new rules for registered advisers to private funds that would increase reporting of fees and performance to both institutional and individual investors, as well as limit preferential treatment given to institutional investors on investment opportunities and information.

The proposals, which were put out for comment, “seek to significantly level the playing field across investors in private funds”, says Gellasch, of Healthy Markets. In addition to disclosure of potential hidden fees, there are “straight prohibitions” on conflicts of interest, and a requirement that investment advisers “at all times” serve the best interest of the client.

“For the high-net-worth or regular saver, the asset management industry as a whole is not offering a simple, scalable investment for what most say they need”

Peter Gleysteen
AGL Credit Management

Moreover, the reforms would require adequate due diligence and a fairness opinion as a check on advisers’ valuation of private fund assets, which are often the basis for calculating fees, and would do away with using agreements or statements in marketing materials that would narrow the scope of an adviser’s fiduciary duty. “If you contractually try to limit your liability as a fiduciary, you may be violating securities laws,” Gellasch says.

The fact there is a need for savers to access safe products that provide annuity-like cash yields is unquestionable, particularly in an environment of negative real interest rates. But it’s not clear that what is being marketed to individuals accomplishes that.

“For the high-net-worth or regular saver, the asset management industry as a whole is not offering a simple, scalable investment for what most say they need – namely a safe, stable cash income, where the investment earns and compounds a return. It’s a dependable annuity they want, versus what is effectively gambling on future asset price levels that is the core of most investment products,” says Peter Gleysteen, founder, chief executive and chief investment officer of AGL Credit Management.

To be sure, the large-scale pursuit of the retail customer with an “institutional-like” product is still in its infancy. Because each product is different, it is difficult for an individual investor to independently compare structures and performance. That contrasts with a publicly traded BDC, where there is ample coverage of the industry by analysts and a daily mechanism for price discovery.

While no one is suggesting that the gold-plated firms are involved in anything untoward, there are risks and issues about how to get the products aimed at the retail investor right. And the chequered history of some private market investments is worth noting as the industry rushes to ramp up its wealth platforms and introduce new products.

It is not beyond the realm of possibility that private investments will one day find their way on to retirement platforms. But although the US Labor Department in 2020 loosened rules to allow defined contribution plans such as 401(k)s to invest in alternative asset funds, late last year it warned plan fiduciaries against the perception that private equity, at least, is generally appropriate in these plans.

Justin Plouffe, managing director and deputy chief investment officer of Carlyle Global Credit, thinks it will happen once the liquidity hurdles are addressed. “We expect to see more private capital options in retirement plans, for the same reason high-net-worth investors are attracted to them,” he says.

As for the overall retail opportunity, Kencel says: “We’re still in the early innings of what is going to be a very long-term trend.”

Early enough, perhaps, that the industry will join with regulators to ensure that the individual investor is well protected.