Firms eye the prize: wooing and winning retail investors

Like a Christmastime rom-com, private equity firms that historically courted institutional asset owners are looking for new paramours on the retail side.

They're not jilting their faithful institutional partners, they say. Rather, they are going after what they see as an untapped, rich source of capital in the retail sector, which they consider to be underallocated to alternative asset classes.

Institutional funds are generally open only to individuals who have at least $5 million in net worth. But managers are now starting to offer investment vehicles such as non-traded business development companies aimed at accredited investors who have to have at least $1 million in net worth, and mass affluent investors, namely individuals or households with between $100,000 and $1 million in net worth.

These new individual investors will enjoy a layer of protection in accessing these investments through intermediaries such as wirehouses and registered investment advisers, according to comments made by representatives of money managers including Blackstone Inc. and Apollo Global Management Inc. to the SEC's asset management advisory committee in January 2020.

Both Blackstone and Apollo thismonth made deals to dramatically expand their retail investment capabilities. On Dec. 2, Apollo Global, with $481.1 billion in assets under management, announced the planned acquisition of parts of retail manager Griffin Capital Co. LLC's U.S. wealth distribution business with $5 billion in assets under management in individual investor‐focused products, mostly in interval funds. Interval funds are closed-end funds that offer to buy back a limited amount of shares at certain intervals, typically every three months.

And Blackstone on Dec. 9 struck a preliminary deal to manage the assets of CAM Capital, the family office of hedge fund pioneer and Caxton Associates founder Bruce Kovner. At the same time, Blackstone hired CAM Capital Chief Investment Officer David Ben-Ur, naming him CIO of Blackstone's hedge funds solutions business. Blackstone declined to provide CAM Capital's assets under management.

These alternative investment managers have high hopes for their new retail businesses.

Marc Rowan, co-founder and CEO of Apollo, said during the firm's Nov. 3 earnings call that expansion into retail was the one of its three "key bets," along with further developing its credit and corporate fixed-income business, and increasing its loan origination to $150 billion from $80 billion over the next five years.

He explained that high-net-worth and other retail investors have begun to accept the illiquidity required to invest in alternative investments because "the traditional markets cannot offer sustainable alpha and sustainable outperformance."

"We looked at the addressable market. It is massive and underserved and it's multiples of that which we historically targeted, but the allocations are a fraction of what an institutional investor has allocated to alternative investments," said Stephanie Drescher, a senior partner and Apollo's chief client and product development officer, in an interview.

Historically, Apollo was more focused on institutional investors and was far more selective of the relationships formed with wealthy investors. The retail investor channel was "not a key piece of our strategy," Ms. Drescher said, "but it certainly is now."

Apollo is concentrating on forming these new retail relationships with family offices or through financial advisers who work for private banks, wirehouses, independent broker-dealers or registered investment advisers, she said.

The acquisition of Griffin Capital will give Apollo "meaningful coverage" of the independent broker-dealer channel and added distribution for Apollo's retail investment strategies, Ms. Drescher said. Griffin also has two interval funds, one real estate-focused and the other credit-focused, which, subject to shareholder and other approvals, Apollo executives plan to advise and oversee.

Apollo executives said they expect the firm's retail business to grow quicker than its institutional business, which is much more mature. Indeed, Apollo estimates that by around 2026, retail capital will account for an average of 30% of its annual fundraising from an average of 5% a year between 2018 and 2020.

"The institutional channel is large, and it will grow, but the growth rates are just different based on maturity," Ms. Drescher said.

And Apollo executives expect that institutional and retail clients, on occasion, will invest together. "There will be investments where institutional and global wealth channels will invest together in the same strategy or theme, but delivered in a format that ensures that it is tailored to that particular channel," she said.

During its most recent earnings call, co-President Scott Kleinman said Apollo is creating investment products just for retail investors, such as a private business development company that Apollo executives expect will become its flagship retail investment vehicle after it launches in early 2022. Apollo also is focusing on enhancing the retail components of its institutional investment strategies.

Blackstone is not new to raising capital from wealthy individuals through its private wealth solutions business, which accounts for roughly 20% of its $731 billion in assets under management.

"If you go back 10 years, we were offering drawdown funds to individuals but there are restrictions around who can own those; one has to be qualified purchaser, with $5 million or more in investible assets," said Joan Solotar, Blackstone's global head of private wealth solutions. "This limits the universe of investors.''

During Blackstone's Oct. 21 earnings call, Stephen A. Schwarzman, chairman, CEO and co-founder, said that the third quarter was "the most consequential quarter" in the firm's history and "represented a defining moment in terms of our expansion into the vast retail and insurance markets."

For example, of the $10 billion raised in the third quarter for Blackstone's core-plus real estate business, the largest driver of its perpetual capital, Blackstone raised $7.5 billion from its retail investors in its U.S. real estate investment trust, Blackstone Real Estate Income Trust, Mr. Schwarzman said. In October, Blackstone launched a European real estate vehicle also designed for retail investors. And also in the third quarter, Blackstone's non-traded business development company, Blackstone Private Credit Fund, raised $3.5 billion from retail investors.

During the same earnings call, Jonathan D. Gray, Blackstone's president and chief operating officer, noted that Blackstone had a head start on the competition.

"And so, others will come into this space. Like everything, there's competition," Mr. Gray said. However, Blackstone's edge especially in the retail space is the "power of the brand," he said.

KKR & Co. Inc. has also identified raising capital from retail investors as one of three main areas of focus, along with growing its insurance business and expanding perpetual capital, said co-CEO Scott C. Nuttall during the firm's Nov. 2 earnings call. He said KKR executives expect capital raised from individual investors will grow to 30% to 50% of the total capital raised "over the next several years," compared to 10% to 20% of the capital raised over the last few years. KKR had $459 billion in assets under management as of Sept. 30.

"We are investing in sales, marketing, data and digital talent, and we are creating more democratized products that are relevant for a wide number of individual investors," he said. "This is a big opportunity for us, and we think we're incredibly well positioned."

However, he added that "we're early days on the retail journey."

"We think around the world, particularly Asia, there's a lot of savings looking for alternatives and exposure to the type of things we do," Mr. Gray said. Globally, there's $70 trillion of wealth "with people with more than $1 million of investible assets, which is the target traditionally," he said. And their average allocation is low, about 1% or so, he added.

"And so, when we think about where this can go … the potential is significant," Mr. Gray said.

Executives at alternative investment manager Blue Owl Capital Inc. also consider the industry in early days in its expansion into retail.

"While retail flows to alternative assets have really begun to accelerate in recent years, we believe retail allocations to alternatives have a lot of room to expand," said Doug Ostrover, Blue Owl co-founder and CEO, during the firm's Nov. 9 earnings call. "We're still in the very early days of rolling out direct lending, GP solutions and, down the line, net lease products to retail, particularly in the wirehouse channels."

Blue Owl had $70.5 billion in assets under management as of Sept. 30.

In the third quarter, Blue Owl raised $1.1 billion from retail investors, with about $500 million of that coming from direct lending, and $600 million coming from its secondary market business, known as GP capital solutions.

"We have believed since day one … that retail is a very large opportunity," Mr. Ostrover said. "It's large, if not larger than the institutional market," but with much lower allocations to alternative investments, he added.