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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Private equity billionaires like Blackstone’s Steve Schwarzman and Apollo’s Marc Rowan will not depend on retirement accounts to subsist in their old age. Yet they think they know what is best for ordinary US pensioners. They deserve a hearing.
The incoming Trump administration is expected to loosen government restrictions that govern investment suitability standards. The result will probably be mom and pop, as retail investors in the US are casually known, having greater access to private asset classes.
A cynical, if reasonable view, is that the big alternative asset managers have bled traditional institutional channels dry. Therefore, the only way for those firms to justify the asset growth that underpins their huge valuations — the likes of Blackstone, KKR and Apollo have equity values of at least $100bn — is to tap the massive individual investor market.
Still, there are solid arguments for democratising access to alternative assets. Wall Street machines are drawing up a rich range of income and yield-based credit products suited to those who will not need to draw on savings for several years, if not decades.
Private markets are also generating significant wealth creation that until now has only been available to institutional capital, including public sector pensions. True, simple and cheap passive index investing has given savers excellent returns for decades. But private capital firms say, with some credibility, that those profits were an illusion of an easy money era. Future excess returns, they say, will require their expert, private markets touch.
That touch does not come cheap. Blackstone’s real estate fund BREIT, for example, charges a 1.25 per cent management fee and then takes 12.5 per cent of the profits. The brokers and wealth managers who market the product to their client base also take a few percentage points. Two years ago, BREIT and similar funds were forced to limit investor redemptions when customers wanted their money back en masse amid market turmoil.
The conceit of private markets is that returns do not closely track public markets and that long-horizon investors, like retirement savers, can make extra returns for taking on illiquidity. Institutional investors unequivocally benefited from private investing over the past 30 years.
But those returns happened when alternative investing was a niche strategy. There are now something like $25tn in combined 401(k) and individual retirement accounts. It will be much harder to earn attractive fee-adjusted, net returns with that explosion of capital.
The best hope for individual investors will be for gatekeepers like Vanguard and Fidelity to drive hard bargains with the Masters of the Universe, to get fee discounts as well as access to the best funds. Mom and pop surely want to invest like billionaires, but not at billionaire prices.
