27 September 2020

Managers Courting New Client Base

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Alternative investment firms are kicking into high gear their efforts to attract retail dollars as they look to diversify into new, and less demanding, sources of capital. The managers are expanding their offerings — adding master limited partnerships, real estate investment trusts, business development companies and special purpose acquisition companies — to meet the growing demand from retail investors, in the U.S. and elsewhere, eagerly diversifying into alternative asset classes to boost returns.

Among the most recent moves:

  • On Aug. 13, TPG Capital LP filed with the Securities and Exchange Commission to create a special purpose acquisition company that aims to raise up to $460 million for an unidentified buyout. The SPAC is called Pace Holdings Corp.
  • On Aug. 6, Apollo Global Management agreed to buy AR Capital, the troubled retail real estate empire of Nicholas Schorsch, as Apollo moves to diversify its investor base.
  • In July, Ares Management LP bought energy manager Kayne Anderson Capital Advisors LP for $2.55 billion to further expand its offerings for retail investors.

Pressured by institutional investors to lower fees and offer more limited partner-friendly terms, and by the Securities and Exchange Commission for greater transparency and removal of conflicts of interests, less-fussy retail money is looking especially attractive to alternative investment managers.

Continued growth 

So far, consultants say institutional investors are not worried about this new source of capital for alternative investment firms because the percentage of retail assets under management is still small. But that percentage is growing. Although Ares had for years managed capital almost exclusively for institutional clients, with the addition of Kayne Anderson, four of Ares' five business lines will have both institutional and retail offerings. When the acquisition closes early next year, some 20% of the combined company's total of $113 billion of AUM will be retail capital, up from 8% as of June 30.

Apollo Global Management's retail business will grow to 20% from 12% of the firm's total assets under management with its acquisition of AR Capital. At Carlyle Group LP, high-net-worth capital accounts for about 14% of the firm's active fund commitments, said Randy Whitestone, Carlyle spokesman in an e-mail. Carlyle cannot provide historical data.

Some 6% of KKR & Co.'s $98.6 billion in total assets under management as of June 30 were from high-net-worth and family office clients, up from 5% at year-end 2014, an SEC filing shows. In the filing, the firm states it is approaching “a new investor base of retail and high-net-worth clients.”

Highest allocations 

Family offices and high-net-worth individuals together have the highest average target allocations to private equity and second-fastest expanding source of capital for private equity managers on an absolute basis, behind sovereign wealth funds, according to research from Paris-based private equity fund marketplace Palico.

Family offices and high-net-worth individuals with more than $10 million in assets increased their average private equity target allocation to 29% from 19% of their total assets five years ago. By comparison, endowments, which have the second-highest private equity allocation, have a 13.6% private equity allocation, up from 12.8% five years ago. Currently, family offices account for 8% of the $4 trillion total private equity AUM worldwide.

Retail investors are starting to demand private equity investments because the sector's returns seem stellar compared to those of public equities and fixed-income investments, said Donn Cox, president and managing director of private equity consulting firm LP Capital Advisors, Sacramento, Calif. So far, LP Capital's institutional clients are not too concerned that adding retail investors' capital into the mix will make it more difficult for institutions to demand LP-friendly changes at negotiation time, he said.

Even so, it is becoming difficult for institutional investors, especially public pension funds, to demand the changes they want from private equity managers because the managers can go elsewhere to access more cooperative capital, including sovereign wealth funds and high-net-worth individuals, said Alex Done, head of private equity for the $163.4 billion New York City Retirement Systems, speaking at Pension Bridge's 2015 private equity conference in Chicago in July.

Steven B. Klinsky, founder and CEO of private equity firm New Mountain Capital LLC, said at the same conference that capital from high-net-worth individuals is providing an alternative source for firms seeking to raise money.

Competing investors 

Tara Blackburn, managing director of Bala Cynwd, Pa.-based alternative investment manager Hamilton Lane, also speaking at Pension Bridge, said institutional investors will continue to compete with other investors for space in the best funds. Sovereign wealth funds and high-net-worth investors are getting bigger as a source of capital for managers, Ms. Blackburn said. That means institutional investors might have a harder time investing with the top-performing managers, who would be less reliant on those institutions' business.

Click here to access the full article on Pensions & Investments.

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