Okay, it's a little more complicated than that.
But I respect any company that knows how to draw a line in the sand, and Apollo Global Management (NYSE:APO) is setting itself apart from competitors Kohlberg Kravis Roberts (NYSE:KKR) and The Carlyle Group (NASDAQ:CG) : By putting a limit on its pursuit of retail money, the firm is thinking of the big long-term picture, and not just the short-term dollar signs.
Apollo is strategically outmaneuvering its rivals by sticking to its guns.
The Trend: How to Get Individuals on Board?
It's nothing new that private equity funds are continuously looking for new sources of revenue and capital, and a very promising source is the individual retail investor. Even though SEC rules have historically barred even the comfortably wealthy from private equity, new structures and strategies are beginning to challenge the status quo.
There are certainly indications that retail investors would love to participate. After all, leveraged buyouts are pretty sexy (in a suit-wearing kind of way), private equity enjoys strong historical returns as a sector, and the industry boasts the titillation factor of being famously inaccessible, like Louis Vuitton handbags once were.
What's not to like? Shouldn't you be investing in the funds that are actively pursuing those customers -- I mean, investors?
On the contrary.
What's so Bad About Retail Money?
I don't agree with pundits who think that retail investors uniformly lack the sophistication or the fortitude to invest in private equity. Any individual has the potential to be a sound investor, just like any institutional manager can make big, embarrassing mistakes.
However, it doesn't change the fact that, on aggregate, individual investors behave inefficiently by following trends -- and each other. The retail market tends to buy and sell as a herd, and individuals often favor stocks that are in the news. It's so bad that stocks with more retail investors are found to be less efficiently priced than those with more institutional ownership.
Now, armed with this knowledge, pretend you're a private equity manager (I find it helps to put on a nice suit). Your fund needs to have capital on hand to make investments, and investments are more abundant and better-priced when the market and/or economy has, in a word, tanked. Now, let's pretend that you have a significant number of retail investors. What do you think they're most likely to do right at the moment when you can most effectively deploy all that capital?
Pull their money out, that's what:
"I've seen retail come in and out of this asset class at exactly the wrong time -- I hate to say it -- for three cycles. This is about the time retail floods in at peak multiples and gets hammered and then, at the first sign of trouble, flees." Apollo co-founder and managing director Joshua Harris
Better to Avoid Skittish Capital
In other words, the last thing you want as a private equity fund manager is skittish capital, and that's exactly what funds like KKR are pursuing. You might be able to accumulate a lot at the outset, and you may be able to collect hefty fees for doing the same old thing while things are rosy, but you may also be setting yourself up for capital outflows and enormous headaches precisely when you need your dry powder and an open schedule.
What About Lockups?
Of course, you might argue that capital lockup periods could solve this problem. I would respond that they might, for a time, but that at a certain point you have to let people withdraw their funds. Thus, you might reduce the inefficiency of a downturn in a particular moment, but you won't ward it off entirely.
I like a fund that looks ahead to preserving its capital base and autonomy in a downturn, which is exactly what Apollo is doing. The company's decision not to pursue retail investor fund structures is not only more prudent from an investment standpoint, it's a more coherent strategy for their business -- which is investing, not chasing down Main Street investors.