Private equity’s pursuit of retail investors is ramping up, with news just this week of US giant Blackstone’s plans to expand its private wealth business.
The firm is looking to enter at least two new European markets next year, Reuters reported, having established a presence in several countries including Italy and France. The business, which has offered retail investors access to areas such as PE and private credit since 2011, is currently worth around $250 billion—23% of Blackstone’s total assets.
Retail investors account for the majority of assets under management globally, and the World Economic Forum expects that share to surpass 61% by 2030—up from 52% in 2021. But only a small portion is allocated to alternative assets. PE has just 16% of the total, according to Bain & Company.
Besides Blackstone, several other firms have launched funds to capture a larger share of this wealth including EQT and Apollo Global Management, who earlier this week announced that retail investors would be one of its three strategic growth drivers.
But while PE’s appetite for retail investor capital is strong, there are indicators that the enthusiasm may not be reciprocal.
Filling the capital hole
The need for new capital sources amid growing competition for institutional dollars has helped drive the pursuit of retail investors.
Bain & Company estimates that institutional capital allocations to alternative investments will grow 8% annually over the next decade. Based on that figure, capital coming from traditional sources won’t be enough to sustain the double-digit growth in fee-bearing AUM that PE firms seek to show.
The need for capital has only intensified in recent years as the end of low interest rates caused the flow of institutional capital to slow. The collapse in public market valuations in 2022 meant that many pension funds and endowments found themselves overexposed to PE, while poor exit markets have prevented the return of capital that would otherwise have been reinvested into the asset class.
According to PitchBook’s Q3 2024 US PE Breakdown, capital raised this year is on track for its lowest annual total since 2020 with a YoY decrease of 17.6% at the current pace. Overall fund count for the year is on course for its smallest figure in a decade.
PE will need new sources of capital for fundraising to return to its previous heights, and retail investors with their vast amounts of wealth are a perfect source. But although interest from the retail market has been on the rise, that appetite may not be as strong as it once was.
Caution ahead
A recent survey from the Financial Planning Association, the US’ membership organization for financial planners, found that only 16.83% of respondents are currently using or recommending private equity investment vehicles to clients this year. This is down from 23.04% in 2023.
The turmoil in the PE market is one potential cause for retail investors’ more cautious approach to the asset class. Also, as with institutional investors, the end of low interest rates has made more traditional investments like bonds more attractive.
Retail investors are typically more sensitive to short-term economic pressure, and wider economic uncertainties including volatility and rising inflation in the past few years may have caused their risk preferences to shift.
While still higher than other asset classes like real estate and private debt, PE returns have been declining. In Q1, PE’s rolling one-year horizon IRR—the annualized average return for the one-year period—stood at 8.7%, down from 10.3% in Q4 2023.
Although PE-backed exit value has rebounded from last year’s decade-long low, 2024 is still projected to come in well below historic norms. That may well spook some retail investors.
Liquidity is also a key factor in retail investors’ hesitation. Many are uncomfortable with the prospect of locking up their capital for a decade with limited ways to get out early, especially when those investors are used to publicly traded assets that offer daily trades in and out. This illiquidity is especially of concern in a climate with higher interest rates and inflation that create more immediate financial pressures on investors.
New retail-focused PE products have emerged to curtail concerns over liquidity. For example, Blackstone’s BXPE fund allows investors to collectively take out up to 3% of the fund’s net asset value each quarter, though they face a penalty if they cash out before two years. KKR’s retail fund offers a similar liquidity mechanism.
Don’t count your chickens
Firms like Blackstone are still counting on one big reason for retail investors to consider private markets.
The number of publicly traded companies has dramatically declined in recent decades, with their number falling from over 8,000 in 1996 in the US to around 4,500 last year.
That makes it increasingly hard for retail investors to access a diverse range of high-growth opportunities in the public markets.
PE offers a route for portfolio diversification and while returns have dipped, PE still outperforms most other alternative assets. Retail investors’ appetite is expected to increase as they seek those higher returns.
But as PE firms hunt for capital commitments, they should be wary of putting all their eggs in the retail investor basket. Those investors may arrive at a slower pace than expected.
Featured image by Drew Sanders/PitchBook News
