Bonanza Private Equity Moves “Bear Market” Amid Bear Market Tensions

As plummeting stocks and recession fears spur interest in alternatives, fund managers and retail markets are moving further away from “wealthy” investors.

After years of private equity firms aggressively marketing themselves to high net worth investors and their financial advisors, the message seems to be starting to emerge.

In the face of a bear market and a bleak economic outlook, marked by inflation, supply chain disruptions and a tightening Federal Reserve, more RIAs and high net worth investors are preparing for alternative investment funds — such as private equity, hedge funds, venture capital and private debt strategies — in their search for return, according to For the advisors and investment managers who spoke with them Forbes.

“I suspect [retail] “There is a feeling among investors that, in general, there are gains and opportunities in private equity and private credit that were not available until recently,” says Donald Kalkany, chief investment officer at Mercer Advisors, which oversees nearly $42 billion in client assets. The growth in demand is particularly “down to market,” Kalkany says, pointing to high net worth investors with $1 million to $25 million in assets.

The trend is 100% towards increase [retail] Allocation “in to alternative funds, says Ken Broadkowitz, chief investment officer at Gries Financial Partners, a Cleveland-based advisory group that oversees about $1.15 billion in assets for high-net-worth clients.” If you can get 10% plus [returns] In alternative investments, where you can control the outcome to a much greater degree, clients are very interested in this. “

Alternative investment firms have traditionally relied on foundations, such as endowments and public pension systems, as well as the very wealthy to fund their investments. However, according to the US Securities and Exchange Commission’s “accredited investor” threshold, anyone with more than $1 million in investable assets, $200,000 in annual income or who meets certain investment industry qualifications (a clause added in 2020) to legally invest in private market funds. This leaves a large untapped market for fund managers.

according to exploratory study Conducted last month at the Morningstar 2022 conference, 84% of nearly 300 investment experts and financial advisors said they now recommend qualified clients put some money into alternative funds. The survey, conducted by private fund platform CAIS, also found that a third of advisors believe that the traditional portfolio of stocks and bonds is “no longer effective.” Over 50 said the same about the traditional 60/40 distribution between stocks and bonds.

These concerns reflect widespread investor anxiety, after a significant historical period for stocks: Between 2010 and the end of 2021, the S&P 500 returned investors to an annualized rate of return of about 14.5% (including reinvestment of dividends). This year, the S&P 500 is down more than 20%.

“I think what we’re going to start to see now that we see a downturn in the market is that people are looking at historical private market returns compared to public markets,” says Stephen Brennan, head of private wealth solutions at Hamilton Lane. Who said private equity and private credit have outperformed public markets “in at least 19 of the last 20 years”.

The historical performance of private equity is a controversial topic. Industry critics say fund managers overestimate their investment performance by relying on a metric called the internal rate of return (or “IRR”), which often does not reflect the fund’s true rate of return for investors.

“Although the stock market is in free fall and interest rates are rising, private equity (PE) funds continue to hunt new investors, spreading the myth that private equity returns defy the laws of financial gravity and deliver solid returns even in economic periods,” Ellen writes. Abelbaum and Jeffrey Hooke, two academics, in out of paper last week.

Some brokers were in Merrill Lynch as well Leave the burning feeling By injecting funds into Blackstone, one of the first participants in the personal investment program among the advisors and the crowd of high net worth individuals. Today, Blackstone, the world’s largest private equity firm, gets about a quarter of its $915 billion in assets under management from retail investors. Apollo Global Management, another leading private equity firm, acquired A retail-focused asset management firm earlier this year to boost its retail offering.

Technology platforms, as well as buyout stores, are eyeing the retail-backed gold rush powered by advisor services. CAIS and iCapital, two private fund markets that connect RIAs with private fund managers, have become unicorns. CAIS was established in 2009, Starch $325 million between January and April at a valuation of over $1 billion. iCapital, founded in 2013, raised $50 million in the same month – at a price mentioned 6 billion dollars valuation. Major private equity investors, including Blackstone, KKR and Apollo, have invested in one or both of the companies.

Other private fund markets are looking to bypass advisors entirely. Moonfare, a Berlin-based company founded in 2016, that gives accredited investors access to private money placements, has facilitated nearly $1.5 billion in investments, according to its website. Moonfare customers can sign up and start investing “in less than 15 minutes” with an investment of at least $60,000.

Prometheus, another retail platform that recently came out of stealth (and among its backers is Thiel Capital, the investment arm of billionaire venture capitalist Peter Thiel) has a minimum investment of $25,000. Low minimums are the core of the “democratization” of the alternatives industry, says Michael Wang, the former hedge fund star who founded Prometheus last year. “The bottom line in a lot of hedge funds ranges from $1 million to upwards of $20 million, so even if you’re a rich guy with $5 million, [putting] A million dollars in one box is difficult.”

As private fund managers and tech startups celebrate the trading of private wealth in private equity, industry critics are left shaking their heads. They believe that many high net worth investors who invest money in alternatives will be disappointed.

“There are fees to invest in the fund, there are fees to be paid to the broker, and there are fees to be paid to brokers or a registered investor advisor… In such a situation, the fees eat up the returns,” said Elaine Appelbaum, co-director of the Center for Economic and Policy Research in Washington, DC Forbes. “I think it would be a rude awakening.”