More alts managers seek expansion to retail market

For Apollo Global Management and other managers of alternative investments, a growing focus on retail investors is providing them with a much-welcomed source of permanent capital and a way to expand their investor base.

They're tapping into the retail market through special purpose acquisition companies, the addition of newer strategies such as interval funds, which are private closed-end alternative investment funds for individual investors, and insurance company acquisitions.

"We are among the largest providers of alternative asset services in the retail marketplace," said Marc Rowan, New York-based co-founder and senior managing director, during Apollo's Feb. 3 fourth-quarter earnings call.

"We elect to do that though in the form of guaranteed income rather than in the form of funds," said Mr. Rowan, who will succeed Leon Black as CEO after Mr. Black's retirement sometime before July 31. Apollo serves individuals directly through its insurance company affiliates, Athene Holding Ltd. in the U.S. and Athora, which is focused on the European market, with guaranteed income products such as annuities, he explained.

One benefit of expanding Apollo's investor base into retail is an end to reliance on raising institutional funds to increase Apollo's total assets under management, he said.

"We are not limited in our growth by the amount of money that can be raised," Mr. Rowan said. "That's not true for every fund and every product. But across our platform, if we want to raise more money, we can be more aggressive in the reinsurance market, we can be more aggressive in the retail market … and so on and so on and so on."

Some of Apollo's strategies for retail investors include $4.5 billion in one of its earliest strategies, a publicly traded business development company called Apollo Investment Corp launched in 2004, and its $7 billion real estate investment trust Apollo Commercial Real Estate Finance Inc. that went public in 2009.

Apollo interacts with retail investors in three ways: it manages money on behalf of Athene, whose annuity clients are predominately retail investors; it offers publicly listed, SEC registered investment strategies; and it distributes its alternative investment products through various high-net-worth retail distribution channels, said Joanna Rose, Apollo spokeswoman, in an email.

"Retail continues to be an important part of our distribution focus and we are adding resources to bolster our broad retail capabilities and relationships," she said.

But in response to a question, she said Apollo executives do not believe the expansion of its investor base with more retail investors affects its institutional limited partners. "We treat all of our investors equally and do not believe one investor type impacts another," she said.

For Blackstone Group, retail investors now account for about 16% of the firm's $619 billion AUM as of Dec. 31.

"In distribution, we're trying to really cover the waterfront," said Jonathan Gray, New York-based president and chief operating officer, during Blackstone's Jan. 27 earnings call. Blackstone executives are raising money broadly from retail investors by speaking with registered investment advisers, the largest distribution firms and private banks around the world, he said.

"What I'd say about retail is we had a big event here: We had a modest celebration, crossing $100 billion of AUM," Mr. Gray said.

"What (retail) investors are seeking is obviously higher return; they want more yield, they're looking for things done at Blackstone quality," Mr. Gray said.

Among the strategies available for retail investors are Blackstone episodic funds generally targeted to high-net-worth investors with the most money. Blackstone also offers newer perpetual capital vehicles, Blackstone Private Credit Fund and Blackstone Real Estate Income Trust. These strategies have "elements of liquidity" that individual customers favor, Mr. Gray said.

"I think historically in private assets distributed to retail, there was a bias, I guess, to try to make short-term money and not necessarily deliver a great customer experience," Mr. Gray said. "What we're trying to do here is give the individual investors the same experience that our institutional investors have."

Other alternative managers also are looking to retail investors to increase their credit businesses.

During Ares Management Corp.'s Feb. 10 earnings call, Michael Arougheti, co-founder, director, CEO and president, said retail is a major area of focus for all of the largest alternative investment firms. He noted that Ares' business development company, Ares Capital Corp., is a way for retail investors to access Ares' private credit strategies. Ares Capital had total assets of $16.2 billion as of Dec. 31, up from $14.4 billion a year earlier.

Ares also has a mortgage real estate investment trust, a closed-end credit fund and $1 billion in a diversified credit interval fund, Mr. Arougheti said. Ares runs the interval fund with retail manager CION Investments.

"I think we, like our peers, will continue to try to innovate," he said.

The challenge is to deliver excess returns in the private markets over the public markets while "solving for some liquidity needs for the retail investor. … I think we and others are beginning to solve for that and we're seeing scale," Mr. Arougheti said. "I would expect, as we continue to build our brand within that channel, that you should expect to see us with other products, whether that's non-traded REIT products or net lease products."

One downside is that SPACs, which Ares and other alternative investment firms have launched recently, could cut into a manager's private equity, growth equity and venture capital deals by scooping up potential investments.

"But I think plenty of opportunity out there, and we're just going to have to see how it all plays out," Mr. Arougheti said.

Hamilton Lane Advisors Inc., Bala Cynwyd, Pa., in January launched a new private equity/private debt closed-end fund for U.S. wealth market — Hamilton Lane Private Assets Fund. And it is also is acquiring 361 Capital LLC, a Denver high-net-worth alternative investment manager, to gain access to its retail clients and the registered-investment adviser, wealth and wirehouse markets.

Alternatives managers are "democratizing access to private markets. What was institutional is becoming more retail," said Hamilton Lane Erik R. Hirsch, vice chairman and head of strategic initiatives, in an interview.

The new fund was seeded with $30 million from Hamilton Lane's balance sheet and $100 million from an institutional investor that Mr. Hirsch said he could not identify. Hamilton Lane already had a similar strategy for non-U.S. retail investors and defined contribution plans.

361 Capital is majority employee-owned with minority investments from Lovell Minnick Partners and Lighthouse Investment Partners. Hamilton Lane manages $76 billion of discretionary assets and $581 billion of assets under advisement.

Also, in January, alternative investment manager Adams Street Partners LLC, Chicago, partnered with Toronto-based CI Global Asset Management to manage a private equity fund for Canadian high-net-worth investors.

The fund is Adams Street's first offering for the high-net-worth channel, said Steven M. Landau, a partner and head of product strategy, in an interview. "The retail market is a very important channel for us. High-net-worth investors are underallocated to private market investments."

Adams Street likely will create more retail-oriented private equity funds given the level of interest the firm is getting in the U.S., Europe, Canada and Asia, Mr. Landau said.

Adams Street manages $44 billion.

Besides building AUM, expansion into the retail investor universe is also helping the firms' credit businesses flourish.

"If you are a direct lender, part of being a lender is being a reliable partner," said Stephen Nesbitt, Marina del Rey, Calif.-based CEO of alternative investment consultant Cliffwater LLC.

Credit managers want to be able to assure borrowers, much of which are middle-market private equity firms, that they will not only offer good terms but will also be there for them when they need refinancing and other services, like a bank, Mr. Nesbitt said.

"If I'm a regular midsized direct lending firm and just doing a private equity fund … I'm vulnerable to market cycles in fundraising," he said. "So, there are questions whether that lender can be reliable."

A manager with permanent capital from sponsoring an insurance company or a business development company is in a better position when speaking to middle-market private equity firms that value reliability as well as favorable loan terms, Mr. Nesbitt said.

Mr. Nesbitt said investment from retail investors and other types of permanent capital is also good for institutional investors because it helps the credit manager compete for deals.

"At the end of the day, all these deals are allocated pro rata across all the funds," Mr. Nesbitt said.

Christine Williamson contributed to this story.