Now, retail investors can get a P-E buzz – without the hangover

Private-equity firms marketing retail-oriented funds that don't require decade-long lockup

Jun 26, 2013 @ 3:45 pm

By Jeff Benjamin

+ Zoom

There's nothing like a little market volatility to remind investors about the virtues of diversifying into alternative strategies.

With that in mind, the current market environment could represent an entry point to the private-equity space, which recently has become enamored with the financial advisory channel.

Nadia Papagiannis, director of alternative fund research at Morningstar Inc., has studied the various efforts by the private- equity market to create products specifically geared toward investors working with financial advisers. In a recent report, she identified a handful of brand-name private-equity firms that are fashioning registered retail-oriented P-E funds.

Ms. Papagiannis pointed out that private-equity firms Carlyle Group (CG), KKR & Co. (KKR), Apollo Global Management (APO), and Blackstone Group (BX) all have recently filed or launched retail-oriented P-E products. These firms are following the lead of Red Rocks Capital Group, which has a five-year-old mutual fund, ALPS/Red Rocks Listed Private Equity Fund (LPEIX).

According to Ms. Papagiannis, the $224 million Red Rocks fund “offers perhaps the most sensible way for retail investors to gain access to private equity while maintaining liquidity.”

In the private-equity space, where direct investments can come with mandatory lockups of up to 10 years, liquidity can be a strong selling point. Add the fact that minimum investments into registered funds starting at $2,500, and it can start to make a lot of sense for investors looking for a new level of diversification.

But there is a double-edged sword with regard to liquidity, according to Mark Sunderhuse, managing director at Red Rocks, which manages nearly $1 billion in the same style as the mutual fund.

“The only reason alternatives have ever worked for anyone is because they stuck with it,” he said. “Investors should stick with a private-equity investment for five to 10 years, but that's difficult because there's a human element involved.”

Mr. Sunderhuse admits it is a bit of a contradiction to offer investors liquidity and then suggest that investors should stay invested for a decade, but he realizes liquidity is a necessity to operate in the retail space.

That said, he still believes the private-equity model works best when the portfolio managers have the time to benefit from a full private-equity cycle, which includes buying a company, often by applying leverage, and then restructuring it for an eventual sale or other liquidity event such as a public stock offering.

Technically, most mutual funds shouldn't demand the same level of long-term commitment as a pure limited partnership P-E fund because most mutual funds are not making the same kinds of investments in individual companies.

The Red Rocks fund, for example, divides the portfolio into three broad buckets, including publicly traded private-equity funds, funds of funds and management companies that oversee third-party capital invested in private equity.

As Ms. Papagiannis pointed out, putting registered-product wrappers around the private-equity space is like most retail-class alternative strategies in that they aren't identical products. But they are close enough to give retail investors many of the benefits of alternative investing.

The Red Rocks fund is up 12.2% from the start of the year, which compares to a 6.8% gain for the MSCI World Index.

In addition to the liquidity that investors are discouraged from accessing, the retail products also come with another big advantage over their private portfolio counterparts: Reasonable management fees.

The Red Rocks fund has an expense ratio of 1.25%. By comparison, most limited partnerships charge a management fee of at least 1% in addition to a standard 20% performance fee.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Behavioral finance’s big innovations

What’s next for behavioral finance? Bernard Del Ray, the CEO and founder of Capital Preferences offers some unique ideas from the 2017 FPA Conference in Nashville.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

How adviser salaries stack up to other jobs

Median compensation hovers just under $100,000 on the low end and reaches nearly $300,000 for bosses.

Finra ranking brokers in effort to crack down on industry's bad apples

All 634.403 reps have been ranked based on factors such as prior regulatory disclosures, disciplinary actions and employment history.

How to save retirement planning from tax reform

Losing big deductions, even in lieu of a larger standard deduction, may cause taxes to rise in retirement.

Advice firms in a tricky financial position

As revenue growth dips and salaries rise, nearly 90% of firms are at or near capacity.

In a turnaround, Wells Fargo Advisors sees slight bump in headcount

Racked by a scandal in its retail banking unit, Wells still managed to add 37 new advisers in the third quarter, a small number but an improvement nonetheless.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print