Apollo. Blackstone. Carlyle.
They are some of the biggest names on Wall Street, managing $720 billion between them. They buy and sell companies on an almost weekly basis, and own national brands like Hilton Worldwide, Getty Images and Norwegian Cruises.
They’ve also historically been the preserve of only the biggest investors, typically public and private pension funds, and sovereign wealth funds.
That’s beginning to change. Wall Street’s biggest names are now out to win the savings of smaller investors.
“We’re investing in the marketing resources we need to attack retail [investors] in multiple ways,” Apollo’s senior managing director Josh Harris said in the second-quarter earnings call on Wednesday. “We’ve always been great manufacturers of return. Increasingly, we are just now making those products available and suitable for retail, which is different.”
Apollo manages $186.3 billion and Harris is a billionaire.
Now, there’s a whole spectrum of investors in the retail market: ultra-high-net-worth ($30 million or above), high-net-worth ($5 million to $30 million), accredited investors ($1 million to $5 million), and mass affluent (anything below $1 million).
Private equity firms started out trying to attract assets from the wealthiest of these groups, such as HNWI families. These high net-worth individuals and family offices interested in accessing private equity funds have traditionally relied on banks such as JPMorgan Chase & Co and Bank of America Merrill Lynch. The banks act as wire houses, where they bundle together smaller investments to invest in the buyout funds.
Now, the private equity firms are moving down the spectrum towards accredited investors. One day, they may even crack open the mass affluent market, given this vastly untapped market segment could be the next leg of growth.
“We’re still in the early stages of this broader, open out type of drama,” Josh Lerner, a professor at Harvard Business School who focuses on the private-equity firms, told Business Insider. “Private equity is a complicated asset class — it takes some real education to understand what makes a good fund and what makes the properties.”
For the individual investors, private equity offers the promise of higher returns in a low-yield world. They’re looking into real estate, bonds and private equity, as they are willing to wait for longer in exchange for modestly higher returns.
When asked about opportunities in the liquid end of Apollo’s credit business, Harris said:
“I think it’s the core pension fund and sovereign wealth funds that we are typically in dialogue with and that are supporting most of our products, but I think it’s also retail. And again, it’s hard to make — making a safe six [per cent return] to eight is actually quite — and taking less risk in this environment when you have the ability — if you buy a BB or BBB, let’s say you buy a BBB high-yield investment, you’re going to make four, and you’re going to have duration. So if you can go to someone and say, ok, instead of four, I’ll give you six to eight, I’ll pull in duration so in case the central banks do decide to raise rates, which we all inevitably worry about and have to think about, you’re protected because you’re floating rate, but instead of daily liquidity, you need to give me quarterly liquidity. That’s quite attractive to our core client. It’s also quite attractive to high net worth individuals and other individuals that don’t have a lot of places to put their money. And so we think long-line it’s going to be a very large product for us.”
Harris had highlighted retail as an underpenetrated market at a Deutsche Bank conference on May 31.
“Today it’s [about] 15% of our investor base, but the average retail investor only has 1% or 1.5% of this money in alternatives versus kind of 10% on average for the big pension funds,” he said.
It isn’t easy to grab this group, and there have been missteps.
Washington-based Carlyle Group had rolled out a “captive feeder fund” aimed at smaller investors in early 2014, but it shut that in April 2015.
That setback was largely due to a lack of traction, Reuters reported. The firm also closed its
Diversified Global Asset Management Corp (DGAM), which would have
allowed ordinary investors to place hedge fund-style bets, according to Bloomberg.
Still, the private equity firms are ploughing ahead. The hope is that one day, they will break into a big market: 401ks.
“What happened in the past couple decades is the big shift away from employees offering defined benefits plan to defined contribution plan — ones where we’re responsible ourselves to do the investing,” Lerner said. “The challenge is if people can make as good investment decisions as pension funds, which have specialised teams.”
Private-equity investments are already available within certain defined-contribution plans, via something called a target-date fund. However, not all big 401(k) sponsors have private equity investments as an option because of their illiquid nature, and because they’re harder to value than stocks and bonds.
Buyout firms have ambitions here. Blackstone is hopeful that it will be able to “crack open 401(k)s in a big way for alternatives someday,” COO Tony James said in the second-quarter earnings call.
Carlyle’s co-founder David Rubenstein said last year in a television interview that a “great revolution” would occur in the near future that would allow non-accredited investors (net worth of lower than $1 million or income less than $200,000 a year) to put their retirement savings [eg. 401k] into private equity.