Institutional investors have realized their lack of influence in reining in the worst behaviors of fund managers and become more aware of the excessive remuneration that these fund managers draw in relation to their actual performance.
Some of the larger LP investors — including pension fund managers like BlackRock and Canada Pension Plan, Singapore’s sovereign fund GIC, and Australian bank Macquarie — have scaled back commitments to external fund managers and chosen to build in-house alternative asset management divisions.
In turn, private capital fund managers have looked for other sources of funds. The largest ones derive perpetual capital from in-house insurance vehicles.[18] It eliminates the need to go to market regularly to raise fresh funds. But perpetual capital pools are only one provenance of easy money.
Taking the retail route is another valuable avenue. One less demanding than institutional LPs. No retail investor could request an observer seat on the advisory board of a private capital firm. None would ever get sufficient influence to challenge the level of commissions. None will have the wherewithal to monitor or investigate a fund manager’s investment decisions. They will be forced to rely on brokers and other intermediaries, piling on further commissions and agency problems.
Retail investors are likely to be even more accommodating than institutions when facing a hike in carried interest or the removal of hurdle rates. In short, they offer all the benefits of institutional money without many of the inconveniences.
As a recent report by PitchBook stated about the opportunity to commit to private markets: “For some allocators, the added complexity and illiquidity will be justified by diversification and alpha potential; for others, staying in public markets may prove the more appropriate path.”[19]
Until private capital faces stronger oversight and offers better terms as far as fees and capital gain allocation are concerned, as well as more liquid secondary markets, retail investors would be better served remaining in public markets.