Private-equity giants set their sights on alternatives for mom and pop

Advisers could benefit as retail investors load up on alts

Jan 10, 2014 @ 12:25 pm

By Jason Kephart

Private equity, alternative investments, Carlyle Group, Blackstone, KKR
+ Zoom

The scramble to gain assets has come to this: Private-equity firms are lining up to court retail investors.

The Carlyle Group last week became the latest P-E giant to unveil plans to offer its investing cache to the masses when it filed to launch its first liquid alternatives mutual funds. It joins fellow big-name alternative investment shops like The Blackstone Group Inc., which filed for its first nontraded real estate fund in December, and KKR & Co., which launched retail funds in late 2012.

“They may have felt they've saturated their client market so they're redefining what that client market is,” said Jeff Tjornehoj, a senior research analyst at Lipper Inc.

Carlyle and Blackstone, who count the world's biggest pension funds, endowments and sovereign wealth funds among their clients, declined to comment because their proposed funds are still in registration. Kristi Huller, a spokeswoman for KKR, did not return calls for comment.

The timing could be good because retail investors, primarily through their financial advisers, are loading up on alternatives to traditional stocks and bonds. Liquid alternative mutual funds had more than $88 billion of net inflows through the first 11 months of 2013, up from $19 billion in all of 2012, according to Morningstar Inc. Nontraded real estate funds had sales of approximately $20 billion, up from $10 billion in 2012.

Interestingly, even though the firms are best known for their private-equity businesses, none plans to launch private-equity funds for the middle market, at least not yet. And that, according to Barry Glassman, president of Glassman Wealth Services in McLean, Va., raises a big question for advisers.

“Is it enough of the firm's expertise to warrant an investment?” Mr. Glassman asked.

Time will tell, but the funds will certainly to have to earn their stripes through performance, Mr. Tjornehoj said.

“You're getting a little bit of everything, but not what you'd expect,” he said. “They're not guaranteed a spot at the head of the table for retail because they've had success in the institutional market. There's a lot of competition.”

Carlyle plans to launch a long/short commodities fund and a balanced-risk global allocation fund. In addition to the Blackstone's plans for a real estate fund, it partnered up in August with mutual fund powerhouse Fidelity Investments to launch a multimanager, multistrategy fund. And KKR launched a pair of high-yield bond funds.

KKR is the only one of the three companies to have retail funds up and running, and it's off to a mixed start.

The $110 million KKR Alternative High Yield Fund (KHYKX) performed pretty much in line with the high-yield bond category average in 2013, its first full year of operation. The fund had a 7.15% return for the year, 26 basis points better than the category average.

The above-average performance didn't translate to a big payday for KKR's first closed-end fund, though. The KKR Income Opportunities Fund (KIO), which also invests in below-investment-grade credit, raised a disappointing $305 million during its initial public offering in July. The timing may have played a critical role, however, as the fund was launched on the heels of June's massive bond fund selloff.


What do you think?

View comments

Recommended for you

Featured video


Dynasty's Penney: How to stay ahead of the curve

With rapid evolution, financial advisers stand at a unique crossroads. Dynasty's Shirl Penney offers some simple strategies to remain a step ahead of the competition.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print