Some of Wall Street's biggest names have their eye on your savings
Rachel Butt
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(Welcome to the club.Lucas Jackson/Reuters)
Apollo. Blackstone. Carlyle.
They are some of the biggest names on Wall Street, managing $720 billion between them. They buy and sell companies on an almost weekly basis, and own national brands like Hilton Worldwide, Getty Images and Norwegian Cruises.
They've made their backers a fair few dollars. On average, alternative-investment firms have delivered 13% a year in returns for their backers over the past five years.
They've also historically been the preserve of only the biggest investors, typically public and private pension funds and sovereign-wealth funds.
That's beginning to change. Wall Street's biggest names are now out to win the savings of smaller investors.
"We’re investing in the marketing resources we need to attack retail [investors] in multiple ways," Apollo's senior managing director, Josh Harris, said in the second-quarter earnings call on Wednesday. "We've always been great manufacturers of return. Increasingly, we are just now making those products available and suitable for retail, which is different."
Apollo manages $186.3 billion and Harris is a billionaire.
Now there's a whole spectrum of investors in the retail market: ultra-high-net-worth ($30 million or above), high-net-worth ($5 million to $30 million), accredited investors ($1 million to $5 million), and mass affluent (anything below $1 million).
Private-equity firms started out trying to attract assets from the wealthiest of these groups, such as HNWI families. These high-net-worth individuals and family offices interested in accessing private-equity funds have traditionally relied on banks such as JPMorgan Chase & Co and Bank of America Merrill Lynch. The banks act as wire houses, where they bundle together smaller investments to invest in the buyout funds.
Now the private-equity firms are moving down the spectrum toward accredited investors. One day, they may even crack open the mass-affluent market, given that this vastly untapped market segment could be the next leg of growth.
private equity AUM composition
(Public pension plans made up 30% of total private-equity assets, the largest investors among all, according to a report from Deloitte. Sovereign-wealth funds ranked second with 17%.Deloitte)
"We're still in the early stages of this broader, open-out type of drama," Josh Lerner, a professor at Harvard Business School who focuses on private-equity firms, told Business Insider. "Private equity is a complicated asset class — it takes some real education to understand what makes a good fund and what makes the properties."
For the individual investors, private equity offers the promise of higher returns in a low-yield world. They're looking into real estate, bonds, and private equity, as they are willing to wait for longer in exchange for modestly higher returns.
This is especially true in Apollo's credit business, as people are looking for places to invest amid the ultra-low interest rate environment.
Here is Harris:
"So if you can go to someone and say, 'OK, instead of 4 [percent return], I'll give you 6 to 8 [percent return],' I'll pull in duration so in case the central banks do decide to raise rates, which we all inevitably worry about and have to think about, you're protected because you're floating rate, but instead of daily liquidity, you need to give me quarterly liquidity. That's quite attractive to our core client. It's also quite attractive to high-net-worth individuals and other individuals that don't have a lot of places to put their money. And so we think long-line it's going to be a very large product for us."
(Joshua Harris, cofounder of Apollo Global Management and owner of the New Jersey Devils, Philadelphia 76ers.AP/Matt Rourke)
"Today it's [about] 15% of our investor base, but the average retail investor only has 1% or 1.5% of this money in alternatives versus kind of 10% on average for the big pension funds," he said.
It isn't easy to grab this group, and there have been missteps.
Washington-based Carlyle Group had rolled out two mutual funds aimed at small investors in early 2014, but it shut them in April 2015.
Still, the private-equity firms are ploughing ahead. The hope is that one day, they'll break into a big market: 401(k)s.
"What happened in the past couple decades is the big shift away from employees offering defined-benefits plan to defined-contribution plan– ones where we're responsible ourselves to do the investing," Lerner said. "The challenge is if people can make as good investment decisions as pension funds, which have specialized teams."
Private-equity investments are already available within certain defined-contribution plans, via something called a target-date fund. However, not all big 401(k) sponsors have private-equity investments as an option because of their illiquid nature and because they're harder to value than stocks and bonds.
Buyout firms have ambitions here. Blackstone is hopeful that it will be able to "crack open 401(k)s in a big way for alternatives someday," COO Tony James said in the second-quarter earnings call.
Carlyle's cofounder, David Rubenstein, said last year in a television interview that a "great revolution" would occur in the near future that would allow nonaccredited investors (net worth of lower than $1 million or income less than $200,000 a year) to put their retirement savings [e.g. 401(k)] into private equity.
