Ready for retail?

As more firms take an interest in the retail investor market, Indus Valley Partners’ Bijesh Amin describes the internal operational challenges that come with the strategy.

Many large private equity firms (e.g. Blackstone, Carlyle, KKR, Apollo) have or are actively looking to join the ranks of alternative asset managers that are accessing the retail market as a source of permanent capital and an additional distribution channel for their funds/strategies.

The most prevalent method to achieve this to date has been through the use of exchange-listed Business Development Companies (BDCs) which are entities self-classified as '40 act' funds, or via Defined Contribution plans within 401(k) programs. In Europe, private equity managers are also considering making some of their investment strategies compliant with regulatory standards that will enable them to market their funds to the retail investor base. 

The operational challenges that lie in wait for private equity managers revolve around managing and coordinating the workflows involved with the multiple players required to successfully build, market and regulate such retail products. For example, fund accountants and administrators are required to provide valuation and accounting services for investors; depository banks are required to hold assets and provide transfer agency; regulators and plan sponsors will require adherence with compliance and reporting requirements; and internal groups will need to monitor performance and risk on the underlying funds and investments.

Also, at any point in time, private equity managers may have multiple funds targeted at endowments, sovereign wealth funds, high-net-worth individuals, as well as the retail investor. Bringing together all the data from these funds and performing aggregation and analysis across the various counter-parties mentioned previously is a mammoth task that typically needs to be performed in-house.

Managing such a diverse set of funds and their associated investors (and regulators) requires a fund platform that can consolidate data from multiple external parties and 'marry' this to feeds from internal groups such as portfolio managers, risk management and compliance staff.

Solutions such as data management platforms do exist in the marketplace but often times they are too generic and require a great deal of customization (e.g. building feeds to administrators, depository banks and internal risk management systems). One solution is strategic partnering with niche firms that have already worked with private equity managers and are familiar with their processes, workflows and counter-parties. Niche firms can provide industry-specific solutions (e.g. a data warehouse) that can ease operational burdens, streamline processes and provide a migration path for a retail offering.

It is equally vital to ensure that key providers such as fund administrators have experience in the underlying asset classes that the private equity fund is taking to the retail market (e.g. CLOs for portfolio companies in a BDC).

With a robust, internal data aggregation and analysis platform in place, private equity managers can ensure they review data from their strategies for accuracy and have confidence in the reports they and their service providers send to sponsors, investors and regulators.
It is the combination of these three elements; 'smart' workflow management, an industry-specific data warehouse, and due-diligence on key service providers, that will help private equity managers to successfully overcome the key operational challenges they face in bringing their funds and investment strategies into the retail investor market.

Bijesh Amin is a managing director with Indus Valley Partners, a provider of technology solutions to alternative asset managers