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Private equity continues expansion into mass affluent

Technology, regulation driving growth

Private equity (PE) has continued to stand out as an asset class amid the pandemic but particularly in light of the significant selloff in growth stocks that has occurred in 2022. While venture capital tends to focus on non-profitable start-up companies, PE has always been focused on accelerating the growth of already solid businesses.

Unfortunately for many, PE “has been a hard place to get into,” according to Andrew Woodman, writing in Pitchbook recently. It has traditionally been the domain of institutional investors, like pension funds, which are able to write “big-tickets” and also deal with the (in some cases) ten-year lock-ups required to see the whole return benefit of the asset class.

Yet a number of changes in the last few years, particularly around regulation and technology, have seen major PE players begin to expand into the “mass affluent” market, which describes people with anywhere between $100,000 and $1 million in investable capital. This ‘untapped source’ represents the next leg of growth for the sector at a time when more companies are choosing to stay private but still require capital.

  • The “comparatively neglected” mass affluent have missed the opportunity in PE despite “angel investors” being a key part of the VC ecosystem, according to Woodman. One of the biggest drivers of the recent shift was the change in regulation in the US, which allowed 401K plans (similar to Australia’s superannuation) to invest in PE for the first time, opening-up a US$6.2 trillion market.

    One of the other key reasons was the emergence of new technology, including the blockchain, which major global player KKR called the “democratization of private equity” when it backed iCapital Network. The platform offers access to the group’s buyout, growth and real-asset strategies.

    According to reports, with many PE firms seeking to raise larger funds given a growing opportunity set, many of their long-term limited partners (LPs), like pension funds, could be nearing their asset allocation caps and struggling to keep up. According to Woodman, if general partners (GPs), another term for the private equity firms, cannot find new sources of capital “fundraising cycles will extend”.

    Clearly, this comes at the same time that the mass affluent have seen private equity consistently outperform significantly more volatile equity markets, and advisers becoming more comfortable with allocating to the sector. The challenge of course for investors and managers will be in achieving the same level of returns as they have in the past, but this isn’t solely restricted to private markets.

    An expanding investor base could mean higher fees given the larger number of intermediaries required, according to Woodman. This is something flagged by existing LPs, with a survey suggesting 63 per cent were concerned that the introduction of non-institutional capital sources may impact returns.

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