Firms eyeing retail should note ‘constraints’ – Alter Domus

This may not be a "breakout year" for retail growth, says Alter Domus's Tim Toska. While familiarity with the product is growing, it might not be time to rush into the market.

Fewer opportunities in the public markets and a need to diversify their retirement investments will help push more retail investors into private markets, says an executive at Alter Domus. But that does not mean managers should necessarily rush to tap the retail vein.

“This year may not be a breakout year in terms of retail investors moving into private equity, but the conversation continues to happen and the familiarity with the industry is continuing,” says Alter Domus’ group sector head of private equity, Tim Toska. “There’s a slow momentum that’s being built, so we will continue to see these investors gaining more access to funds they wouldn’t have had access to previously.”

Wealth managers can create aggregate funds, or feeder funds, that would pool investments from hundreds of retail investors to make one large allocation to a PE manager. And some private equity firms have started creating hybrid funds, such as interval funds or business development companies, to give retail money access to investment opportunities.

“I think ’40 Act funds, feeder funds and other platform/technology products are great avenues for private equity managers to get access to more capital and retail investors, but there are additional constraints to be aware of,” Toska advises.

“You really have to consider whether there is enough demand for this strategy from the retail clients and whether your firm has invested in technology and third party service providers to assist when considering whether you want to structure your fund to be able to accept these investors.”

Among those constraints, Toska notes that retail investor demand greater transparency and reporting that PE managers may not be accustomed to, which would require new and better methods of sharing data and important fund information.

“Firms and providers like ourselves are building out technologies, platforms and portals to share data instantaneously to all investors,” Toska notes. “When you’re working with retail investors, communication is different than you see with institutional investors.

“There have been issues where emails are missed, investors have missed capital calls or were confused about distributions. If you have a lot of investors in the fund now, that becomes a bit of a burden on how you communicate to them all. That’s where these new technologies, platforms and portals are really coming into play and becoming much more important.”

Toska predicts that as retail investors continue to seek access to private equity, the challenge for managers will be to service a considerably larger LP base that has less knowledge of the asset class than institutional investors, but has equally (if not more) challenging demands and concerns.

This manager challenge presents considerable opportunities for fund administrators, Toska says.

“Technology will be the differentiating factor for private equity managers to improve the efficiency of processes and services, such as AML/KYC and sub doc processing, in order to handle high volume of new investors.”