KKR & Co LP (KKR 3.71%) wants to give affluent retail investors access to the vaunted world of private equity through a new third-party investment vehicle. Of course, as anyone who has ever stood in line to pay far too much for terrible drinks and worse music already knows, no one just grants mere mortals access to an exclusive club out of sheer generosity.
So what's going on here?
Private Equity Trends in a Nutshell
Bain Consulting puts out an annual private equity industry report that provides a consistently beautiful overview of what's happening in this heady world. Fundraising has grown, and is going swimmingly for the biggest and most well-known funds, but deal flow has been a problem -- private equity funds are collectively sitting on over $1 trillion of "dry powder," or available capital.
That would imply that there's either been a decline in deal flow or the value of deals, and it turns out it's a bit of both. In North America buyouts declined 22% in value and 21% in number when you strip out two massive public-to-private transactions (Dell and Heinz, if you're interested).
Most of the decline is attributed to the eerie stability throughout the developed economies, more financing options for potential buyout targets, and a healthier equity market, which translates to a healthier IPO market. Combined, these factors make potential sellers much more likely to demand higher prices for their companies, or much less likely to entertain a buyout in the first place.
Unless the supply of good buyout targets increases, all this excess capital will only serve to increase competition and keep asset prices high, which could depress returns going forward.
So, Why the Move Towards Retail?
Well, private equity firms have long looked to diversify their sources of capital, so this is perhaps a bold new step in that direction.
The push-pull between institutional investors and private equity funds is a possible reason that three of the largest funds (KKR, Blackstone, and Fortress) decided to go public -- the public markets are a nice way to raise capital directly to the management company. In the wake of the financial crisis, institutional investors got a leg up through their ability to renegotiate fees.
Today, the search for maximal performance at a minimal cost continues through "sweeteners" like co-investment opportunities and separately managed accounts for big investors.
Perhaps institutional investors are learning from their funds in order to mimic the strategy on their own? Some research indicates that it's been difficult for institutional investors to successfully manage private equity in-house, but perhaps with training the future will be kinder. In that case, private equity funds will have to compete even more rabidly for institutional dollars.
Maybe there's also the issue of attention. Private equity funds spend a lot of time on the road raising capital from institutional investors, who can command a potentially enormous amount of attention and time. Retail investors, on the other hand, are more or less used to being a number.
In that case, maybe going after the affluent retail market -- through a conveniently placed third party who can deal with the compliance headaches -- is a way to get more bang for marketing buck. This is especially plausible for well-known brand-name funds. What better way to streamline the fundraising process than by deploying accumulated goodwill?
It's not clear that the SEC will even allow this novel investment structure to take off. But wherever private equity goes from here, I imagine this is just the beginning of a move toward the broader retail market.
