BREAKINGVIEWS-Buyout barons salivate over uncertain wealth prize

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

By Jonathan Guilford and Liam Proud

NEW YORK/LONDON, Nov 20 (Reuters Breakingviews) - Everyone investing in private markets agrees: to go big, you have to go small. Alternative asset managers which dabble in private equity, real estate, and infrastructure grew large and rich by raising money from pension funds, endowments, and other big custodians of cash. Now they are increasingly turning to smaller individual investors. Their estimates of how much is up for grabs range from tens to hundreds of trillions of dollars. The discrepancies betray difficult trade-offs inherent in designing new products - and in squeezing into tight regulations. No wonder investors are taking a wait-and-see approach.

Blackstone BX.N owes a decent chunk of its industry-leading $1.1 trillion in assets to early success in cracking the “private wealth” market. President Jon Gray, whose firm has managed vehicles designed for individuals for years, now talks about an “$80 trillion wealth space”. But even that huge number seems pessimistic next to rival Apollo Global Management's APO.N boss Marc Rowan, who touts a $150 trillion total addressable market $(TAM.UK)$. Most starry-eyed is KKR KKR.N, which flagged a $197 trillion private-wealth market as of 2022. The numbers are a melange of estimates from analysts like Preqin and Bain & Co., with extra guesswork thrown in.

Blackstone’s relative modesty belies its strong track record. Take its $52 billion property investment vehicle, Blackstone Real Estate Income Trust (BREIT). The fund is open to individuals with both a minimum gross income and net worth of $70,000, excluding their home value. Throw in similar products targeting private credit and equity, and Blackstone’s private wealth assets reach $250 billion. Apollo and KKR, which oversee comparable pots of cash worth $30 billion and $75 billion, respectively, are itching to catch up.

The payoff promises to be huge. Funds purpose-built for the workaday wealthy are now mostly “perpetual” or “evergreen”, which means they have no set expiration date. Once up and running, the vehicles throw off an endless stream of payments. BREIT charges a management fee of 1.25% of net asset value $(NAV)$, implying about $700 million of annual income using the most recent figures. There’s a 12.5% performance fee on top. Blackstone’s “fee-related performance revenues,” which includes that cut of the upside, exploded from just $100 million in 2016, before the launch of BREIT or credit-focused BCRED, to $2 billion in 2021.

The downside is that mom-and-pop investors can walk away, since most vehicles allow limited quarterly redemptions. A property wobble spooked BREIT’s investors in 2022, who withdrew nearly $23 billion through 2023. Performance fees crashed.

That might guide Blackstone’s relatively conservative estimate of the potential private wealth market. It only includes people with investable funds of $1 million or more. These “high net worth individuals” have about 4.5% of their investments in alternative assets, according to a Bain & Co. analysis, compared with a quarter for public pensions and sovereign wealth funds. Essentially, Blackstone is measuring what’s up for grabs if the very affluent start investing more like large institutions.

More ambitious estimates involve extra leaps. Apollo’s figure includes over $60 trillion of “accredited” investor money, comprising people with more than $200,000 of annual income or $1 million of net worth. These days, that’s a large market. The Securities and Exchange Commission estimated that 24 million American households, or 18.5% of the total, exceeded the threshold in 2022. In 1989 the figure was just 3%.

Tapping this much-bigger asset pool adds complications. For buyout vehicles serving accredited investors, U.S. rules require that 60% of assets are deployed in companies the manager directly controls. That restrains dabbling in, say, growth equity, where minority stakes are common. KKR, Blackstone and Apollo chose different sides of this trade-off: KKR’s K-PRIME courts the accredited crowd, while Gray’s buyout-focused BXPE and Apollo’s roughly equivalent vehicle only accept “qualified purchasers,” or those with over $5 million in investments.

KKR’s even-bigger market estimate reflects this choice, stretching to include “mass affluent” investors: those with $100,000 in assets. Fewer of these potential customers have financial advisers, and their money often sits in defined-contribution vehicles like U.S. 401k retirement schemes. It’s been tricky to get private-market investments into these products.

In the United States, pension-plan holders have sued chipmaker Intel INTC.O for investing employees’ money in pricey hedge funds and buyout products, chilling the wider industry. Regulators can help by making clear that retirement vehicles can welcome alternative assets, even if they incur higher fees than passive index-tracking funds. The U.S. Department of Labor in 2020 issued a letter gesturing in this direction, but people familiar with the industry told Breakingviews that widespread wariness of private funds remains among companies sponsoring 401k schemes and the asset managers administering them. Other approaches also face limits: collective investment trusts can hold private assets but are urged to keep beefy, return-sapping cash reserves.

Perhaps that’s why alternative asset managers’ shareholders aren’t jumping for joy quite yet. KKR reckons that, if individual investors allocate 6% of their assets to the industry, $11 trillion could flood into alternative investments by 2027 relative to 2022 levels.

Imagine that Blackstone, KKR and Apollo grabbed a tenth of that – roughly the three firms’ current combined share of alternative investments held by individuals, according to Breakingviews estimates. If the average evergreen vehicle throws off 2.5% of assets in management and performance fees, this would translate into $27.5 billion in annual revenue. Since they keep around 60% of fees as earnings, that would add an extra $16.5 billion to their collective bottom lines. That’s almost as much as analysts expect them to report together from all their existing businesses in 2026, according to estimates compiled by LSEG.

It's safe to say investors are not pricing in anything on that scale. At a price-to-fee-earnings ratio of around 28, around where Apollo, Blackstone and KKR trade based on 2027 estimates, the private-wealth windfall should be worth $469 billion in equity value. That’s more than their combined $370 billion market capitalisation today. Wealthy individuals have alternative asset managers dreaming of vast new markets. Their shareholders are less starry-eyed.

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CONTEXT NEWS

Blackstone said on Oct. 17 that it had raised $21 billion from private-wealth clients in the first nine months of 2024, or roughly double the sum it raised from individuals in the same period a year earlier.

Apollo Global Management on Oct. 1 said that it planned to raise $30 billion a year in new money from private wealth clients between 2025 and 2029. That compares with $11 billion raised from individuals in the 12 months to June 30.

(Editing by Peter Thal Larsen and Streisand Neto)

((For previous columns by the authors, Reuters customers can click on GUILFORD/ and PROUD/Jonathan.Guilford@thomsonreuters.com liam.proud@thomsonreuters.com))