Is the wealth channel the bagholder?

PE needs buyers and there's never been a better time to 'democratize' alts

Publishing note: Random Walk is going to experiment with a different publishing cadence over the next few weeks (more details forthcoming). I will endeavor to trade some frequency for depth, at least some of the time.

• wealth channel is the hottest thing in private capital markets

• buying a bundle of HNW aum

• make it semi-liquid

• for the most part, it’s a healthy marriage of supply and demand, but don’t make retail the bagholder (and how to know the difference)

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Is the wealth channel the bagholder?

Consider this a part II to Saving the Worst for Last.

Wealth channel is so hot right now

The hottest thing in private capital fundraising is the “wealth channel.”

Who is in the wealth channel? Rich people, essentially, as opposed to institutions (like endowments, pensions, etc.), who have money to invest, but not quite so much money as to have been previously worth the time and effort for fund managers to chase.

Why chase non-institutional wealth now?

Well, there’s a few reasons.

• institutions are largely tapped out in the absence of meaningful liquidity, so fund managers have no choice but to chase individuals.

• Plus, from a less-cynical perspective, there happen to be a lot of individual wealthy people who’d like exposure to private market opportunities, so they can compound their wealth.

Sure it’s a new “AUM-land to conquer” for managers, but it’s also supply meeting demand (ideally making everyone richer), and that’s good.

More simply, to use Apollo’s elegant turn of phrase, the wealth channel is a “massive opportunity”:

Apollo Q1 Investor Day

$150T worth of AUM to conquer, the vast majority of it currently frittering and wasting in the public markets.

And so, we begin to see a lot more headlines like these:¹

• iCapital snaps up Citi’s als fund platform in latest wealth power play

• JPM passes $1B mark for fund tailored to private investors

• Funds for wealthy investors snap up expensive private equity stakes

et cetera, et cetera, et cetera . . .

Buying a bundle of HNW

Of course, to get access to individuals (and the relatively smaller checks that they write), managers don’t approach them individually. That would be “too much wood to chop.”

Instead, fund managers find individuals where they’ve already been aggregated, i.e. the aforementioned “wealth” channel, including RIAs, wealth managers, multi-family offices, etc. That’s why wealth managers have become the hottest asset on the block (and seemingly the only asset that managers actually want to buy these days).

The wealth channel is a portal to the otherwise fragmented retail and semi-retail dollars that asset managers want to invest.

Make it semi-liquid

Now, there’s another reason why individual investors have (historically) been a poor fit for private capital.

Individuals don’t have the patience or expertise to lock-up huge amounts of capital in illiquid vehicles for 5-10 (or who we kidding, 12-15) years at a time.² Institutions want to set-and-forget compounding, and they generally don’t mind illiquidity (until they do), but at least they know how to prepare for it (sort of). Individuals, though, want to spend their nest-eggs from time-to-time, and they have other objectives (and time-preferences) then say, an endowment or pension.

But, fund managers have a solution for that too: semi-liquid structures, like interval funds and evergreen vehicles, that provide interim/partial liquidity for investors.

So, you’ve got (a) a need for new AUM; (b) a retail customer with a desire for private market yields, (c) a product that fits retail liquidity preferences, and (d) an intermediary that can efficiently match supply and demand.

Put it all together, and you get: