Untapped: Sponsors mine the reserves of rich individuals

Data InsightDealspeak 30 January

Untapped: Sponsors mine the reserves of rich individuals

With many sponsors struggling to raise flagship funds, big names have started boring capital from high-net-worth (HNW) individuals and smaller family offices. At the same time, new institutional investors are thinking hard about increasing their exposure to private assets.

“The ‘retailization’ of private equity is something that everyone has been chasing for a while, but now we’ve seen some tangible steps towards that actually happening,” said one fundraising lawyer.

Take asset manager Blue Owl Capital [NYSE: OWL], which raised USD 3.6bn from HNW individuals in 3Q21 via a special vehicle and has partnered with Allfunds [AMS: ALLFG] and iCapital to evaluate how retail investors can access its funds.

Other asset managers, too, have already joined the quarry, with Eurazeo [EPA: RF] recently stepping up its solutions dedicated to retail. This resulted in EUR 800m of raised capital across all strategies, an increase of 46% on the year before.

Moves like this could act as a gateway for a wider pool of limited partners (LPs) to look seriously at joining private equity (PE) funds.

The amount raised by buyout funds has more than doubled over the past 20 years, with peaks in the late 2010s. However, the past year has seen a small blip, with large and small funds alike wrestling at the coalface with LPs declining to shovel commitments as readily as before. As a result, fundraising is down 39.3% last year versus 2021, according to sister service Unquote Data.

Forge ahead

Alternative assets (including PE) are growing in popularity with HNW individuals compared to bonds and equities due to attractive yields and the chance of some protection from interest rates and inflation. The conversion of significant numbers of HNW individuals into LPs would be like striking gold for the PE industry, helping it 'ore to new heights.

The secular trend of PEs increasing their dominance of the business world began when Kohlberg, Kravis and Roberts — now better known as KKR [NYSE:KKR] — began bootstrapping family-owned companies that were too small to list in the 1960s. A new vein of LPs would serve to support the trend.

As well as HNW individuals, PEs are also thinking about accessing pension funds that have stayed out of private markets up to now. Last week, Schroders [LON: SDR] won a mandate to invest GBP 500m (EUR 568m) in private assets on behalf of eight Welsh pension funds.

Canary in the mine

However, retail investors, prone to frenzies at the top and bottom of markets, might prove troublesome investors for general partners (GPs), especially if sponsors offer some liquidity options. Last year, PE giant Blackstone [NYSE: BX] had to limit withdrawals from its USD 69bn US-based real estate income trust (REIT). The fund, aimed at HNW individuals, offered monthly redemption rights.

Even if the PE industry can avoid issues like this, targeting smaller-ticket LPs can be very resource intensive, with a strong need for investor education. This means that large-cap sponsors will find it easier to mine this field than their smaller peers.

There are a haul of big fund closes expected this quarter, via flagship strategies from Astorg, Bridgepoint Group [LON: BPT], CVC Capital Partners, Cinven and EQT Corp [NYSE: EQT].

Will the funds be able to extract cash from a wider pool of LPs? If they can, it will be a warning to smaller sponsors that they too will have to think about conjuring a similar kind of alchemy.

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