Alternative investment shops want to tap the trillions of dollars in retirement accounts.
Private equity has long been an exclusive club, a world of opaque funds and high fees where only the wealthiest and most sophisticated investors can gain a foothold. Its allure lies in its promise of blockbuster returns: daring financiers pile up mountains of debt to buy companies, then attempt to revive them—with scant oversight. Now those same firms want a piece of your nest egg.
Seeking to tap the trillions of dollars in brokerage accounts held by everyday investors, these companies are cozying up to traditional asset managers. Alternative investment shops, which specialize in asset classes outside public stocks and bonds, have been touring mutual fund houses to gauge their interest in tie-ups that would dramatically extend their reach. “There’s a lot of conversations,” says Russ Ivinjack, global chief investment officer at consulting firm Aon.
Collaboration makes sense for both sides. The alternative firms suffer from anemic brand awareness beyond Wall Street, and they lack the vast sales teams needed to raise their profile. A few years back, Bain & Co. asked wealthy individuals to name three alternative asset managers; the top response was “I don’t know,” followed by old-guard financial powerhouses such as Fidelity Investments, Vanguard Group and Charles Schwab.
Those icons of the 100-year-old mutual fund industry, meanwhile, are in need of some new energy as customers abandon their bread and butter—actively managed investments—for funds that simply track various stock indexes, where the fees are racing toward zero. So just as the alternative shops are rolling out retail investments that they say offer the returns of private assets and diversification away from public markets, the traditional firms have been eyeballing the world of private equity.
In recent years private equity has dipped its toe in with funds offering greater liquidity because they don’t lock up investor cash for years, but these were marketed only to wealthy individuals. Now, through their tie-ups with traditional asset managers, they promise even-more-liquid offerings—including some exchange-traded funds—for the masses. Those are seen as a test case for broader distribution, with the ultimate goal of tapping into the $12 trillion held in retirement funds such as 401(k)s and IRAs.
Last May, alternative asset giant KKR & Co. linked up with Capital Group, an investment firm that manages more than $2.7 trillion in assets, mainly in equity and bond funds. They have announced a pair of jointly administered products that will invest in both public and private debt. And State Street Global Advisors, which manages $4.7 trillion in client money, in September jumped in bed with Apollo Global Management Inc. for a listed fund to invest in private credit—loans made by nonbank lenders—alongside the public bonds more typical of its offerings.
BlackRock Inc., the world’s largest asset manager, in September teamed up with PE firm Partners Group to focus on products for retail investors. That deal came amid a pair of acquisitions that helped bolster BlackRock’s private equity and credit portfolio. “We’re seeing a lot of experimentation,” says Hugh MacArthur, chair of Bain’s private equity practice. “These models haven’t been tried out before.”
Lawyers and consultants working on such tie-ups say many more are on the way, but myriad questions remain. It’s not clear, they say, how well private and public assets can work alongside each other in a single fund, how liquidity can be guaranteed or how profits might be split. A regulatory filing by State Street regarding its partnership with Apollo spurred the Consumer Federation of America to write regulators raising concerns about liquidity, valuation and conflicts of interest.
Some in the business question the logistics of partnerships between companies with completely different playbooks, worrying about their ability to communicate effectively. And if it’s ever to become a part of retirement funds, private equity may have to reduce its fees to win widespread adoption, says Will Hansen, a lobbyist for the American Retirement Association, a trade group of financial and advisory professionals. “It all comes down to complexity, liquidity, cost and education,” he says.
Some traditional asset managers fret about the reputational risk of such investments. Private equity can retreat to its successful niche of managing illiquid investments. But the standing of mutual fund houses, whose names will be on the new products, will be on the line, and a high-profile blowup could taint an image built over decades. Everyone involved is “dedicating significant resources trying to figure out how to successfully create suitable products,” says Lawrence Calcano, chief executive officer at alternative investments platform iCapital. “We’re all interested.”
Written by: Loukia Gyftopoulou and Allison McNeely @Bloomberg
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