Private equity is in the throes of its biggest and most consequential transformation since the industry’s conception 50 years ago.
Change started with a trickle of firms, led by Partners Group in the early 2000s, creating novel “evergreen” fund vehicles that would court wealthy individual investors by offering them semi-liquid exposure to private market assets that previously were open only to pensions, endowments and the super-rich. Over the years, the wealth channel represented just a fraction of assets under management—until recently.
Today, having a wealth offering is becoming a commonplace, if not required, feature of the private fund industry, and it now makes up a sizable and rapidly growing chunk of fee-generating capital.
Unlocking private wealth’s potential trillions of dollars has set off a revamp animated by a central theme: scale.
Fund managers across all private asset classes are devising semi-liquid interval funds and other vehicles to make the private-market model less complex and more affordable for an investor base of millions of high-net-worth individuals.
The new playbook
Solving that transition has pushed the industry into a steep learning curve.
“They’ve had to really think through—if we’re going to have success in the private wealth channel, we can’t use the same playbook that worked in the institutional side,” said Phil Huber, head of portfolio solutions for Cliffwater, a manager of three interval funds totaling $39 billion raised mainly through registered investment advisers. “It can be the same strategies and asset classes, but it has to be delivered in a more convenient wrapper.”
Since the advent of private equity firms in the 1970s, managers have largely stuck to a single fundraising model targeting a small number of institutional and super-wealthy investors.
But a new formula started to take hold in the past 10 years, accelerating dramatically since the pandemic, as firms stretched to adapt that same batch of private market strategies and repackage them at a vastly larger scale.
Now almost all of the largest fund managers are hawking so-called wealth-management solutions marketed to investment advisers, whose clients hope to outperform the public market by tapping into alternatives like private credit, real estate, infrastructure and private equity.
Paying off
So far, the strategy is paying off handsomely in gaining fee-related capital. Through this year’s first quarter, PitchBook data shows that assets in perpetual strategies from the top seven publicly traded alternative asset managers totaled $1.7 trillion, up 21% year-over-year and representing 41% of this cohort’s total AUM. Several senior executives have been telling Wall Street they expect wealth-driven assets to soon reach 50% of their capital.
Partners Group’s $48 billion in assets from the wealth channel makes up almost one-third of its total AUM. The firm expects to double the number of its professionals dedicated to private wealth in the next five years, in line with a proportional leap in assets from that channel.
Most alternative-asset managers historically built their firms to meet the needs of sophisticated investors, who represent large pools of capital allocated across public and private asset classes.
But branching out from an institutional-only client base into the wealth market has forced the industry to range gradually beyond its core competency.
To adapt to an entirely new market with vast growth potential, firms across private credit, real estate and infrastructure have been aggressively retooling their teams.
A hiring wave has put a premium on specialists who can help package and translate the product for financial advisers. Recruitment for that talent is at an all-time high, with 152 wealth-focused staff moves in this year’s first quarter and 434 moves all of last year, according to executive search firm Jensen Partners.
While fund managers are still serving the institutional market, they’re working alongside a new and growing crop of retail-minded investment professionals exclusively focused on the financial goals—and limitations—of wealthy clients, whose investing knowledge and experience is mostly in the public market.
Pain points
At Partners Group, the pivot to wealth began two decades ago when some advisers to family offices asked what it would take to work around private fund barriers like high investment minimums and capital calls, to name a few of the standard pain points.
“We love solving problems, and we listen to our clients,” said Robert Collins, the firm’s global co-head of private wealth. “Our objective was: How can we provide this product in a way that addresses those concerns?”
Pivoting to private wealth and its differences from the institutional market has required creative innovation, but Collins said the firm has been mindful that experimentation can be fraught with risk when putting something untested into the market, adding, “We don’t experiment with people’s savings.”
As institutional investors lighten up on their private market allocations, PE’s long-term growth plans hinge on winning in the wealth channel, a pool estimated by Bain & Company at up to $150 trillion worldwide. Putting those plans into action has resulted in hiring, partnerships and acquisitions—an overhaul highlighting what was a kind of mismatch between PE and private wealth.
Eager to amass capital on a massive scale, PE firms are continuing to build out teams capable of translating the industry’s opaque, illiquid strategies into a form that appeals to the millionaire next door.
One relatively recent entrant to the channel is Vista Equity Partners, the software buyout specialist, which last year hired executive Dan Parant, a 12-year KKR veteran, as its global head of private wealth solutions. Parant had previously held alternatives-facing intermediary roles at Neuberger Berman and Lehman Brothers.
Go-betweens
The industry is navigating a two-fold challenge as it diversifies beyond the old institutional investor base. The first is gaining expertise working with the private-wealth market, where independent financial advisers are rapidly emerging as the most important go-betweens for reaching wealthy clients.
The second is creating sales, distribution, marketing and client-support teams that help PE teams extend their brands on a scale that far outstrips how firms traditionally operated on behalf of institutions. At KKR, for example, there are about 2,000 institutional clients while the firm’s wealth channel serves tens of thousands of financial advisers.
A key part of the buildout has focused on scale via sales and distribution teams tailored to different wealth channels. KKR’s coverage of US wirehouses includes over 20 salespeople who engage with advisers, and a separate dedicated team working with platform “gatekeepers,” or senior leaders who decide which strategies are added to their platform.
“Even if we’re just looking at the wirehouse channel, that’s 60,000 advisers, which is more volume than any size team can cover,” said Doug Krupa, head of KKR wealth solutions for the Americas. “We lean in with large platforms to educate their internal alternatives sales teams, and we leverage our digital marketing and a broader distribution infrastructure that we’ve built. All of this is a force multiplier to our team in the field working with advisers.”
Symbiotic relationships
Private fund firms and wealth managers used to work on parallel but separate tracks for decades. More recently, their markets have converged, prodding them to form close, symbiotic relationships to exploit the boom in products aimed at individual investors.
It’s all leading to an unprecedented makeover of leading firms in both of their industries, as both sides learn how to cooperate and broaden their reach. Some large RIA platforms are adding top talent to bring in expertise about alternative assets, while smaller firms rely on counsel from outside advisers like Mercer and Hamilton Lane.
The Carlyle Group, Blue Owl, KKR and several others have ramped up hiring of personnel with previous experience in other areas of asset management—including building financial products for individuals and running a distribution strategy to market and sell those products to high-net-worth investors.
In a marketplace already crowded with scores of firms offering wealth-targeted funds, time may be running short for newcomers willing to make the investment in what it takes to join the competition, said Neil Blundell, head of investments at CAIS, a fintech intermediary for alternatives.
“I think there’s still space that exists, but I do think there’s a moment where if you don’t invest, it becomes like the mutual fund industry where there’s like 10, 15, 20 winners,” Blundell said. “If you’re just staying on the sidelines too long, you might not be able to build your brand in wealth, and it might be too difficult in the future.”
Featured image by Jenna O’Malley/PitchBook News
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