With the announcement that Blackrock is suggesting retail investors reconsider a traditional 60/40 (equities and bonds) mix and replace it with an 80/20 mix of public and private assets in June (50%, 30%, 20% equity, bonds and alternatives), the spotlight is on the private markets for the coming decade and providing private equity firms in particular, which have not had the greatest public relations reputation, a public opportunity to refine their brands and improve trust as retail capital gravitates towards their offerings.
Institutional investors have accessed private equity with gusto as they recognize the illiquidity premium that comes with investing in private markets, while retail investors have been historically under allocated to alternatives at around 5%. While large RIAs suggest a 11-15% recommended allocation, these new channels of access are bringing with it new avenues for private managers to communicate and for many a chance to revitalize or reinvent their image. With this opportunity comes an opening to fully educate investors on why alternatives are where they should invest their money and why now.
Private equity is being democratized
With KKR being the latest entrant into the mass distribution of its private equity strategies to accredited investors with its tie up with iCapital earlier in the year, and its push to democratize PE to a wider and less educated investing marketplace, we are witnessing just another step in the gradual creep of bringing private investments to the public investor market.
The advent of the amendment of the accredited investor rule by the Securities and Exchange Commission (SEC) under Jay Clayton in late 2020, added to the move of private to public and followed the JOBS Act of 2012 that gave hedge fund managers more opportunity to advertise and be more open with their dialogue with the press and the materials they can post on their websites.
With the latest change, the rule has updated and improved the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. Allowing individuals to participate in private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.
The SEC expects the total pool of individual investable assets to rise from $70 trillion in 2018 to $106 trillion in 2025, while average allocations to alternative investments for individual investors are less than 5% to alternatives, compared to 27% for pension funds and 29% for endowments.
Against this widening investor base, these new offerings create an opportunity for private firms to go to public markets and embrace a level of publicness around their communications that reflect these investment offerings as not just creatures of Wall Street, but as creatures of main street, the media, bloggers, Congress, and the government.
With these new lines of product and services communication blurring, private managers and other sponsors have been given an opportunity to educate and inform newer investors about how their investment products work, why an investor should buy them, where they fit in their asset allocation mix and the inherent risks they are taking relative to other public or private available investment options. Alternative investments are typically sold not bought.
In essence, private funds managers are being given an opportunity to communicate more like a mutual fund manager – proactively. Though mutual funds have been doing this for years and in both channels, adding a communications strategy for a whole new audience is no easy thing and takes a lot of thought to do it correctly. It also requires increased levels of transparency, something that might put some private firms off to begin with.
To launch or not to launch? That is the question
For many private sponsors, especially traditional hedge fund managers, the rules and the environment have never lent itself to allow these managers to tap a wider audience outside its traditional institutional marketplace.
However, in June 2020 the U.S. Department of Labor, which governs 401(k) retirement accounts, clarified that under federal law DC pension plan, fiduciaries have the ability to incorporate certain private equity strategies into diversified investment options, such as target-date funds. Analysts at Evercore estimate that as much as $400 billion in new assets, out of the $6.5 trillion 401(k) market, could make its way into private equity funds.
It is not all about brands: Set out your stall
Going into public markets, medium sized private firms especially face a myriad of challenges, with one of them being brand recognition as many investors are just not aware of their existence.
While an anathema for many private managers that have been reactive in the private world to the press, a well-established earned media strategy focused on your core firm messaging can go a long way to establishing trust and building your brand and essentially punching above your weight when compared to the big brand name media spends.
Biggest is not always the best. The key to competing with larger private and established public facing managers is to have a focus and a keen understanding of your products and services and a recognition as to how they serve their end audience. Your utility.
Ultimately, managing mutual fund assets and public money is difficult at the best of times, though it takes a completely different skillset to manage private assets. While not all private investments are created equally, it is important for any private manager that is looking to add a new line of business, especially to investors outside of their normal client base, to ask, “why now?” and “why us?”.
Discovery of answers to those questions can be difficult and require some soul searching as to whether firms are set up to compete for capital with some of the bigger brand names, though if the stars are aligned, there is a lot you can do from initiating a well-designed, earned media strategy, especially similar to what mutual fund managers have been doing for years.
Craig Allen is Managing Principal at Allen & Associates, a financial services consultancy and has 20-plus years of experience executing communications programs for mutual fund, alternative and multi asset solutions investment companies and was previously a journalist covering alternatives at Institutional Investor.