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Fitch Ratings sees the development of new retail-orientated investment vehicles as a key source of asset manager growth, but over time it may also lead to increased regulatory scrutiny, additional operational complexity and different reputational risk considerations.
Many PE firms have already attracted capital from retail investors. Publicly traded vehicles, such as business development companies (BDCs), closed-end funds and ETFs all served as initial points of entry into the retail space for alternative firms, and while total capital from these vehicles is relatively small to date, Fitch expects product innovation to open up additional retail channels in the coming years.
Blackstone noted on its last earnings call that it raised nearly $7 billion from the retail channel over the preceding 12 months. This amount is more than 10 times the comparable level of $600 million in retail capital collected during 2009.
Defining the scope of retail investing can be a difficult matter, given the wide variance in assets and investment objectives. It is safe to say, however, that PE firms are now interested in targeting a broad range of investors, which extend beyond "high net worth" to "mass affluent" and "Main Street." The latter two are categories that have historically been outside the focus of most alternative asset managers.
However, this shifting focus is a necessity as defined benefit plans; historically one of the largest sources of capital for PE firms, are gradually being replaced with 401(k) and other employee-managed defined contribution plans. According to Preqin, pension plans account for 43 per cent of total retirement assets in the US, but Fitch expects that share to decline over time as traditional pension plans give way to defined contribution plans for most private-sector employers.
Regulatory and operational hurdles exist, but PE firms are focused on developing products that will allow individual investors the ability to allocate retirement funds to alternative investment strategies, including PE, within their retirement plans.
While Fitch expects retail investors to account for a larger share of assets under management over time, expansion into this new limited partner base will need to be managed carefully and will come with material product development costs. The sophistication of retail investors varies widely. Complicated fund terms, high management fees, fund under-performance and a lack of product liquidity could lead to negative attention for fund managers, potentially limiting their ability to raise new capital. The risks of a regulatory response would also rise in such a scenario.