ILPA’s Choi: Is private equity even ready for retail capital?

LP-GP alignment and how incentives can impact GPs’ behaviour are front of mind for institutional investors as the industry makes changes to its investor base, according to Jennifer Choi, chief executive of the Institutional Limited Partners Association.

Speaking to affiliate title Private Equity International at the ILPA Summit Europe in London last week, Choi said: “There’s always going to be a question around alignment… between the original institutional LPs in the commingled fund and the GP, and the alignment between those institutional LPs and the non-institutional LPs… and incentives and how does that impact on behaviour on the GP.”

Choi noted that true retail investors – not necessarily high-net-worth individuals – enter the asset class through feeder platforms with terms, cost structures and economics that could all affect a manager’s thinking on how and where to invest. These factors are top of mind for LPs when the subject of retail investment comes up, she added.

“The next question is… is the industry even really ready to do this? Because if true retail capital comes in beyond the high-net-worth… you could spend a lot of time just on that, because that’s a lot of money. You have to believe that there is going to be a level of transparency and simplicity required and timeliness in the reporting.”

According to a report by Bain & Company, there is around $275 trillion of wealth globally, of which individual investors hold roughly half – and yet, they only account for less than one-fifth of private capital AUM.

This vast untapped market, which spans the mass affluent to UHNW individuals, has become increasingly attractive for private markets managers. Firms including Ares Global Management and Hg have set up dedicated wealth units over the last two years. EQT plans to launch semi-liquid products this year to expand its reach in the private wealth segment, while Blackstone, KKR and Apollo Global Management have boosted efforts to efforts to staff up their wealth units, with some noting that the wealth channel could contribute between 25 and 50 percent of their future inflows.

Blackstone, which has one of the largest wealth units in the industry, recorded $48 billion of sales in the private wealth channel in 2022, the firm said in its full-year 2022 results.

Choi noted that liquidity structures, as well as the infrastructure of funds, have to look different in order to effectively serve retail investors.

“There’s just a lot infrastructurally that is difficult to execute at scale,” she said. “When an LP pushes a GP to provide, say, the ILPA fee reporting template and the GP resists, is that because they can’t do it, or because they choose not to?

“And if you apply that to the retail context… if [the GPs] cannot because the investment in the technology or use of a third-party fund administrator isn’t in place yet, you have to wonder, how will [they] serve an even more demanding clientele than the institutional LP community?”

“We don’t yet have that level of standardisation and simplicity in private markets,” Choi said.