Of all the areas tipped to grow in the next decade, retail investing in private credit is probably the most tantalising prospect. GPs are already lining up to test-drive retail – and there are predictions that retail investors could one day match institutional investors in terms of capital committed.
When Apollo Global Management closed its acquisition of LA-based wealth distribution and asset management business Griffin Capital a year ago, it added 60 professionals that distribute products across the wealth management landscape, particularly in the independent broker-dealer channel. Complementing its existing focus on private banks, registered investment advisers and family offices, Apollo’s move echoed earlier build-outs of wealth platforms by competitors such as Ares Management and KKR.
Tapping the retail market will be a big theme for credit managers with the scale to make similar moves, says Ken Kencel, president and CEO of Churchill Asset Management. “Most of our peers are now focusing on the next generation of investors in private credit – the individual investor. We have already seen that start to emerge in a significant way in the wealth channel and that is something we are very focused on,” he says.
“We have two publicly registered BDCs today, and a closed-end fund we manage as well. The next phase of private credit will be led by the firms that have demonstrated an ability to raise capital through large-scale broker dealers, registered investment advisers, family offices and individual clients.”
As private debt funds have gotten bigger and become recognisable names for those individual investors, the market is opening up. Kencel says that scale is likely to be a definite advantage in the retail market. “Smaller firms are finding it harder to compete. Broker dealers really want to bring established branded players to their clients, so they too are focused on the big names that are well-known to individual investors and the high-net-worth platforms.”
He adds: “In order to interface with those platforms, and particularly with registered investment advisers, you must have invested significant resources in infrastructure and people to not only deliver the story to those investors, but also to work with them and support them over time. The largest managers are investing heavily in their finance, reporting and investor relations functions to support these efforts.”
“Managers can tap into high-net-worth and ultra-high-net-worth pools that may not have had access to private credit in the past”
Robert Molina, managing director and head of origination at Briarcliffe Credit Partners, says raising capital from retail investors is no easy win. “The really big firms now all have teams of 80 to 100 people dedicated to their retail channels, which just goes to show they are really appreciating the growth potential in that space,” he says. “But those investors first require education about the asset class, so it is a longer conversion process to raise capital out of that space.”
Tapping retail investors requires two things, according to Molina; first comes education and then the structuring. “A lot of traditional private credit funds have minimum subscriptions that they can take from LPs, and they need to create structures with minimums as low as $50,000,” says Molina.
“There is no doubt that GPs now want to attack that market, but if you are allowing lots of small subscriptions into your fund, that is a lot to manage. That is why a lot of third-party providers are creating feeder funds that make it less resource-intensive for GPs.”
Scoping the market
The retail market is a broad one to define, ranging from the individual-on-the-street investor through to sophisticated, very wealthy individuals. Jeffrey Griffiths, co-head of global private credit at Campbell Lutyens, says: “It has been shown that managers can tap into high-net-worth and ultra-high-net-worth pools that may not have had access to private credit in the past, by which I mean people with investable assets of more than $1 million. That is a sophisticated pool that can understand private lending and, most importantly, can take some liquidity risk on their investment.”
But the real holy grail is accessing the mass affluent market below that level, either via DC pension schemes or through listed vehicles like BDCs in the US, he says. “The market in Europe is yet to come up with a structure that works like that for retail investors. I do think that will happen, but liquidity will remain the biggest problem,” he adds.
There are clear differences between the retail markets in the US and Europe. Andrew Bellis, global head of private debt at Partners Group, says the opportunity may not be anywhere near the same for Europe-based managers: “On the retail side, my view is that US and Asian individual investors are willing to take more risk and in general are more active with more channels available to them to access private credit than European investors. The mindset in the US is quite different.”
The challenge in Europe, Bellis says, is the lack of an equivalent to the US BDC legislation and the fact that European investors are more cautious in terms of the level of risk they want to take. He remains unsure if the retail market in Europe will develop the same way as elsewhere: “It will take time and it may require regulatory change,” he says. “If you look at investor base growth, particularly from individual investors, the US is really going to see that more rapidly than Europe, as has been the case so far.”
“Investors first require education about the asset class”
Briarcliffe Credit Partners
In the US, Kencel sees potential for individual investors to transform the investor base of the largest managers: “I could certainly see a dynamic where the wealth channels – such as BDCs, closed-end funds and other vehicles – might represent a third to a half, or more, of the total capital held by the typical private credit manager,” he says.
He cautions that retail investors do need support with additional liquidity requirements, however: “The nature of the wealth channel means that those investors have more of an orientation towards liquidity,” says Kencel. “Individual investors are more focused on having access to some form of liquidity versus large institutional investors managing billions of dollars, as we have seen with the redemption requests for some of the large private REITs in recent months.
“As managers build out their wealth platforms, it is critical to market to investors that truly understand what they are investing in and to structure offerings appropriately for their needs.”
The tech behind retail expansion
As managers line up to woo retail investors, technology firms are busily working on tools to unlock some of the barriers to access.
A big area of focus has been on creating platforms that can aggregate sizeable pools of retail capital and channel those to a fund sponsor, while tech is also helping to bring transparency to the asset class and streamline onboarding.
Hamilton Lane has developed a platform called Cobalt LP that can be used by private markets investors to do modelling and analytics to better understand what that investing might look like – essentially a digital database and portfolio manager selection tool that enables clients to compare managers against each other.
Fred Shaw, chief risk officer and global head of operations at Hamilton Lane, told affiliate publication Private Equity International that the tech side of wealth management platforms is developing rapidly: “For example, digital assets, tokenisation and digital share classes are designed to streamline some of what has historically been an archaic process around subscription agreements, capital calls, distributions and tax management, and make it much easier to navigate.”
Many managers are embracing tokenisation as a means to broaden investor bases and lower minimum subscriptions. This year, Hamilton Lane tokenised a portion of its $2.1 billion Equity Opportunities Fund V, allowing US qualified purchasers with at least $5 million in invested assets to access a tokenised feeder fund for $20,000 at a time, down from a traditional minimum ticket size of $5 million.
Elsewhere, KKR tokenised a portion of its $4 billion Health Care Strategic Growth Fund II, while Singaporean digital assets platform ADDX secured an allocation in 2021 to Partners Group’s €5.5 billion Global Value SICAV Fund, giving non-US investors access with a minimum ticket size of $10,000.