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EY survey: Nearly half of PE firms targeting retail and wealth management investors to increase AUM

As more PE firms look to institutionalize their business, part of their strategy is to increase allocations from new investor bases.

Unprecedented inflows of capital into private equity in 2021 haven’t kept managers from proactively targeting retail and wealth management investors in order to further increase their assets under management, according to EY’s annual Global Private Equity Survey.

The survey found that 46 percent of private equity firms are looking to increase the amount of capital they get from retail investors and wealth management firms.

Forty-one percent of firms are relying on their existing investor network to access this potential investor base. To achieve their goal of bringing more retail capital, 32 percent of firms have started listing on bank wealth platforms and 7 percent of firms are listing on fintech platforms that aggregate individual retail investors together.

EY partner Kyle Burrell told Private Funds CFO that with changing regulation and the increase in technology allowing firms to tokenize shares or allow fractional share ownership of private funds, there has been greater democratization of private equity, which has also led to more product innovation. “We’ve seen the innovation of product offerings, including institutional managers pairing with private equity managers as sub-advisors, and offering private investments to retail and wealth channels, and all of those things are coming together to allow more firms looking towards those channels to increase their assets under management.”

With the SEC redefining “accredited investors,” expanding beyond the minimum threshold of $1 million and looking at professional knowledge and experience, as well as certain certifications of eligibility, retail and wealth clients have more opportunities to invest in private capital. “I think we’ll see more of a shift towards this going forward,” said Burrell.

Burrell noted that the survey also found more PE managers are focusing on the importance of strategy at the management company level. He said that the trend of PE firms seeking investments from retail and wealth management firms is part of that strategy discussion, as PE managers consider whether that is an avenue they want to go down.

“It is interesting that only half the firms are looking at this stream of growing assets under management currently, but I believe this trend will continue and more firms will start looking at the retail and wealth channels and how to service them,” Burrell said.

PE firms are also focused on maturing and institutionalizing their businesses, Burrell added. CFOs are shifting their focus from creating sustainable operating models in the back office to making strategic decisions about firm operations to create value for investors and prevent potential missteps that could damage their brand recognition and value.

When asked to rate the maturity of their management company, 84 percent of fund managers with more than $15 billion in AUM, 71 percent of mid-size managers and 56 percent of smaller firms said they are ahead of their peers.

“A majority of firms we spoke to believe they are ahead of their peer groups and are maturing as expected, but there is still room to grow,” Burrell stated.

To add value to their business, 56 percent of managers surveyed said they had acquired another firm, while 31 percent had sold a non-controlling interest in their management company to raise capital. Thirty-one percent also said they had engaged in debt financing to expand operations.

As more private equity firms look to build more mature and stable businesses, talent management is becoming a top area of focus. Improving diversity, equity and inclusion is also seen as key to building a sustainable private equity brand. According to the survey, 87 percent of firms over $15 billion said DEI is their firm’s most important talent management priority. Eighty-one percent of firms with $2.5 billion to $15 billion in AUM cite that as their top priority, as well as 56 percent of firms with less than $2.5 billion in assets under management.

Increasing representation of women and underrepresented minorities, especially in the front office, is a priority focus for respondents to the survey. “We’re seeing an increased proportion of the firm being women and underrepresented minorities, but there is definitely room to grow,” Burrell said.

Managers also cite hiring and onboarding talent as a priority, although this is a greater area of focus for small and mid-size managers.

With the onset of remote working policies during the pandemic, small and mid-size firms are more often hiring the best talent regardless of location, Burrell said. “Many of the largest firms are still trying to get all of their people back into the office full time, where mid-size and smaller firms are really adapting to the hybrid work model, lending to the trend of hiring the best talent regardless of where they may be.”

Of the larger firms, 29 percent said they want employees to eventually return to the office five days a week and 66 percent would like employees in the office at least three days a week. Small and mid-size managers are more likely to remain fully remote, at 13 percent and 7 percent respectively; or only require employees to come into the office once or twice per week – 13 percent and 15 percent respectively.

“I think the competition for talent currently is at an all-time high and firms are using work flexibility as one option to attract and retain employees,” Burrell observed.