[August 2023]
1 minute speech
Title : Want to Invest in Private Equity? You're Not Alone
Link : https://youtu.be/49fsB8FDzt8
1. Key words
private equity, individual investors, assets, alternative strategies, Bain Capital's report, growth, management fees, partnership, GP Stakes investing, fees, crowdfunding platforms, Moonfair, trend, funds, investors, facilitators, educate
2. Summary
Private equity is attracting individual investors. With half of Earth's assets held by individuals but only 16% in alternative strategies, the tide is changing. Bain Capital's report forecasts 12% growth in individual investment. Management fees, once insignificant, now contribute significantly to private equity partnerships. GP Stakes investing lets investors own parts of private equity firms. Fees, including crowdfunding platforms like Moonfair, should be understood. The trend of opening private equity to individuals is led by funds, eager investors, and facilitators. Educate yourself before diving in.
3. Script
Want to invest in private Equity? You're not alone. In this video, we're going to explore how private Equity is increasingly chasing wealthy individuals and what you should be aware of. So let's Dive In.
There are approximately 285 trillion dollars worth of assets under management on planet Earth. Surprisingly, half of it is held by individuals, but they only hold 16 percent of capital allocated to Alternative strategies such as private equity. And that's changing. According to Bain Capital's Global Private Equity report, private equity funds are trying to attract money from smaller investors, and smaller investors want in.
In the past 25 years, the number of public companies in the U.S has decreased by roughly one-third, and the universe of remaining public companies is ever more tech-heavy. In other words, the public opportunity set is shrinking, which makes private equity increasingly attractive. Let's start by exploring this from the private equity perspective.
Bain's report forecasts eight percent annual growth for institutional investment in alternative funds for the next decade, but 12 percent growth from individuals over the same period. So, individuals are a huge untapped resource.
Now, if you go way back, management fees, which typically range from 1.5 to 2 percent of committed capital, were originally thought of as a 'keep the lights on' fee. Fast forward to today, and they've become a meaningful source of revenue for private equity partnerships. So much so that it's become an investment opportunity in and of itself.
What does that mean? Through an activity called GP Stakes investing, an investor takes partial ownership of the private equity firm's business model, which includes the management fee. And this differs from a traditional private equity fund investment, in which gains come only from the performance of the firm's portfolio of companies.
It's attractive because management fees are steadier than the lumpy gains a partnership realizes from acquiring and then eventually selling companies in its portfolio.
If you look at the private equity fund structure, you'll see that fees are primarily earned through management fees and carried interest. And traditionally, the focus was always on the latter. Tweaking this business model shifts the focus from portfolio performance to fundraising, which is why the largest players are entering retail markets.
Blackstone and KKR are both developing and launching alternative funds open to individual capital. Apollo Constitution Capital and Blue Owl are also implementing retail-oriented strategies.
So, what should you be aware of as an individual? Perhaps unsurprisingly, given the introduction, it's fees. Because all private equity investors are not created equal in the world of fundraising. There have always been incentives to encourage investors to act quickly and at scale, and these investors get preferential treatment.
So-called private equity side letters are used to offer special rights to certain investors and limited partners, even providing them with favorable fee exposure. In a recent conversation with a fund manager, I learned that they had started using crowdfunding platforms to raise capital from individuals on one fee structure and then filling the gap with a large institutional investor on a more favorable fee structure.
This means that individuals need to be aware of both tiered management fee structures and fees they have to pay for access. Moonfair, for example, is an online platform created to give individuals access to private equity.
And on their site, they include one-time fees ranging from 0.5 to 1.5 percent of each allocation and a yearly management fee as low as 0.35 percent depending on share class.
Now, investing in private equity isn't easy. Each transaction requires a substantial amount of work. So, I'm not saying additional fees are unwarranted, but that investors should educate themselves on what's acceptable.
So, to wrap this up, the trend of opening private equity to individual investors is being pushed on three fronts: by private equity funds, individuals eager to participate, and middlemen ready to facilitate the transaction. Which means it's a near sure bet that the trend will continue.
Before testing the waters, take the time to educate yourself on how private equity works and make sure you understand both liquidity requirements and fee structures for any funds you're considering taking part in.
If you're interested in this topic, I have a more detailed post available on ASM's website, and I plan to cover this in more detail in the future as well.
All right, team, that's all for now. Thanks for watching.