$140 trillion looking for a home…

For the first time, wealthy individual investors around the world hold more capital than the entire institutional investor community.

 

Here’s the headline stats; private capital accounts for around 51-52% of global capital now but only 16% of alternative assets under management. In the next decade estimates suggest that private capital flows into funds and private markets will grow by c300%.

 

Traditionally the holy grail for fund managers old and new was to secure that anchor pension fund or insurance account. Tech entrepreneurs were pounding the pavements of zip code 94025 looking for Patagonia vests that might land them those institutional VC and PE cheques.

 

And I’m not suggesting for a second that those routes are dead.

 

But hiding in open sight is the largest block of capital available to funds and founders we have ever seen. The baby boomer generation is sending wealth down to a digitally aware, empowered and financially savvy generation of investors at a rate of hundreds of billions per annum. Their attention might start with stocks but only 15% of companies with revenues over $100mn are publicly listed so getting wide exposure to the broader economy is very difficult and most US or even global equity products are magnificent 7 ETFs in drag.

 

So, we have an enormous pool of informed capital seeking a home.       

 

We’ve seen a number of the largest PE firms create retail facing funds in the last year or two. Many are publicly listed and realise that to hit their own internal AUM growth targets they must look for an asset pool growing far faster than available from institutions. There is absolutely no reason why most fund managers shouldn’t adopt the same dynamic.

 

In fact, an emerging fund or founder is much more likely to attract private capital anyway. Institutions move slowly, can’t write small tickets & culturally are a mis-match for most early stage funds. 

 

Ok, but what about liquidity, regulation, distribution, brand and many more potential barriers to engaging private capital.

 

Let’s spend a few minutes on each:

 

Liquidity

Private capital hates long lock-ups and even if it indicates an acceptance on the way in & endless disclaimers are landed, the moment it faces a cash crunch it will seek an ability to withdraw. Just take a look at the problems faced by the real estate fund sector in the last 2-3 years.

 

From a GP perspective, it’s also uncomfortable to have to figure out how to contact ‘retail’ investors in the same way that a friendly call with a professional LP would have managed a liquidity mismatch.

 

Intermittent liquidity is an effective compromise for funds that simply cannot (and should not) offer daily, weekly or monthly liquidity. A proportion of the NAV that can be traded every month or quarter can help bridge the competing concerns. However, if your strategy is traded daily, do all you can to offer constant liquidity to your investors.      

 

Regulation

We completely understand the reticence of many fund managers to face what can often be unintelligible regulatory rules and interpretations aimed at protecting retail investors. Allied to this, the litigation, fine and censure risks are real.

 

That said, many regulators, including the SEC, have introduced helpful definitions of different categories of private investors. The concept of  ‘qualified or accredited’ investors beyond purely wealth-based criteria enables conversations with those that have sufficient knowledge and expertise when entering your fund.    

 

Distribution

The key here is to embrace channel based marketing. Most fund managers don’t have the resources to create an army of sales-people and marketers & these days the jury is out on the effectiveness of these brute force tactics. Instead take a good look at the proliferation of platforms that enables you to leverage your reach – Moonfare, iCapital, Opto and indeed our own Raiser marketplace are all great examples.  

 

Brand

Perhaps the most daunting of all the perceived headwinds. Technology and asset management is dominated by global mega brands that always appear to fall over new business by dint of their pure size and reach. The secret sauce for most is separating personal from corporate brand evolution. If budgets and time are constrained, develop a personal brand strategy for all your front line people and adopt LinkedIn as your brand channel.     

 

So, would private capital work for you?

 

We thank Bain, Preqin and Globaldata for the statistics, we also remind readers that this paper is not designed to be legal, regulatory or financial advice. Do your own research and always take professional specialist advice.