Alternative asset managers have built enormous businesses by tapping into institutional capital. Institutional investors like pension funds, endowments, and insurance companies have an estimated $135 trillion to $140 trillion pool of investable capital. These investors have been increasingly allocating more of their portfolios to alternative investments like private equity funds, hedge funds, and private real estate and credit investments. They're earning higher returns and experiencing lower relative volatility in alternatives compared to the public stock and bond markets.
However, institutions control slightly less than half of the world's wealth. Private investors hold the other half, estimated to be between $140 trillion and $150 trillion. These investors only represent about 16% of the assets under management (AUM) held by alternative investment managers. Thus, high-net-worth individuals represent a massive growth opportunity for leading alternative asset managers Blackstone (BX -0.99%), Brookfield Asset Management (BAM -0.61%), and KKR (KKR -0.91%). That's leading them to create products geared toward these investors. Tapping into this market will help grow their AUM, fee-related earnings, and dividends to shareholders.
Leading the charge into retail
Blackstone has been an early leader in tapping individual investors. The leading global alternative asset manager has developed several investment vehicles for retail investors. The most notable is its non-traded REIT, Blackstone Real Estate Income Trust (BREIT), which it launched in 2017. The company also has a retail-focused private credit fund (BCRED).
Blackstone has experienced the benefits and drawbacks of this strategy in recent years. Investors poured capital into BREIT and BCRED in 2021. BREIT pulled in nearly $25 billion (almost 70% of all capital raised from non-traded REITs that year) from investors, and BCRED hauled in $14 billion. However, market turbulence spooked investors in 2022, causing a flood of investor redemption requests late last year. Blackstone has had to limit redemptions over the past few months to preserve liquidity.
The company's strategy has paid big dividends over the longer term. It has helped increase its distributable earnings by 20% annually over the past decade, more than double the rate of the broader market. Blackstone returns all that money to investors via dividends (which currently yields 4.7%) and share repurchases. While the company's retail investors have proven to be a bit flighty during downturns, that capital should return as market conditions improve. Further, the company's leading platforms should continue drawing in new investors as more increase their allocation to alternatives.
Tapping into a new growth market
Blackstone's rivals want to follow its lead by tapping into the massive individual investor base. A recent report by Bain & Company forecasts that individual wealth invested in alternatives will grow at a 12% compound annual rate over the next decade as this group increases its allocation to these investments.
KKR expects 30% to 50% of new capital raised in the coming years will come from the private wealth channel. It's tapping that opportunity by following Blackstone's lead in forming a non-traded REIT. The company launched KKR Real Estate Select Trust (KREST) in 2021 to help capture this market. While it has faced some of the same recent redemption headwinds as Blackstone, the REIT and other retail-focused investment vehicles could be major long-term growth drivers for KKR by expanding its AUM and fee-related earnings. That would enable KKR to continue growing its dividend. The company recently increased its payout by 6%.
Brookfield relaunched its non-traded REIT, Brookfield REIT, in 2021 to start tapping into the retail market. Meanwhile, the company recently launched Brookfield Infrastructure Income Fund (BII). The innovative, semi-liquid infrastructure investment product will provide high-net-worth investors access to its infrastructure platform. Brookfield noted that it has already raised $750 million from investors for this fund. These products will help drive fee-related earnings growth for Brookfield, which it sees rising 15% to 20% annually. That should drive similar growth in its 4%-yielding dividend.
A massive opportunity ripe for the taking
Individuals hold more than half the world's wealth. However, they've allocated little of this money to alternative investments compared to institutions. That's leading alternative asset managers to launch products tailored to individual investors' investment needs.
While this strategy has endured a setback over the year due to market volatility, it could be a major long-term growth driver for Blackstone, Brookfield, and KKR. It should expand their AUMs and fee-based earnings, giving them more money to pay dividends to shareholders. Their retail growth strategies could help drive market-beating total returns in the coming years.