Institutional investors have contributed over a trillion dollars to the growth of the global private capital market, but as they reach their long-term strategic asset-allocation goals and face economic headwinds, the environment is becoming more difficult for managers to raise capital.
As a result, fund managers are starting to pivot their fundraising efforts toward the non-institutional space, with the private wealth channel considered to be a $80trn marketplace, according to a report by the Capgemini Research Institute.
One of the managers leading the way in the private wealth space is Blackstone, which manages $240bn on behalf of individual investors, roughly 25% of its $975bn assets under management. The firm raised $48bn in the private wealth channel in 2022.
Private Wealth Solutions
Spearheaded by Joan Solotar since its launch in 2011, Blackstone's Private Wealth Solutions (PWS) business was born out of the group's desire to expand into this growing market.
Todd Myers, COO of PWS, told Investment Week this unit has been an "enormous growth catalyst" for the firm.
Blackstone has spent over a decade building out its PWS platform, which offers products such as the public non-listed $70bn Blackstone Real Estate Income trust (BREIT) and $50bn Blackstone Private Credit fund (BCRED).
The firm is also planning the launch of a new private equity fund - BXPE - which is designed to offer wealthy individuals access to its $289bn private equity platform.
However, the Financial Times reported in December the launch may be delayed as the firm awaits better fundraising conditions.
The business has close to 300 employees around the world and has doubled its headcount over the last two years. Most of the team is based in the US, with around 40 professionals in Europe and a smaller team in Asia.
Managers increasingly look towards private wealth for capital raising
"There has been significant investment in this business, which the firm continues to put its resources behind. We do not have any targets necessarily for the growth opportunity, but we know that the overall private wealth market is very significant," Myers said.
"We will continue to invest in the business in the short, medium and longer term. We feel very confident that the growth that we have experienced has been able to create the scale that you need for the infrastructure to support [wealth management] firms."
According to a recent report by Bain & Co, alternatives assets under management of private wealth investors are expected to grow from $4trn in 2022 to $13trn over the next decade. The report also found that while individual investors hold nearly half of all global wealth, they only account for 16% of private capital assets.
Redemptions saga
While private markets vehicles that provide quarterly or monthly liquidity are growing in popularity, at times of volatility and falling equity markets these funds can become victims of their own success.
As investor withdrawals surged, Blackstone limited redemption requests on BREIT for five consecutive months. Requests rose 15% in March to $4.5bn, following the collapse of Silicon Valley Bank, and BCRED also reached its 5% redemption limit for the first time in December.
"The fact there has been some press related to redemptions is a function of the fact that in volatile markets, there is always an expectation that clients will want to perhaps look at a different risk profile for some of their portfolio," Myers explained.
Blackstone receives over $5bn in redemption requests in property fund - reports
BREIT is structured in a way that allows the manager to gate the fund or slow the rate of redemptions in order to limit the amount of money returned to investors. This is to avoid selling the fund's best properties in a declining market to fulfil redemption requests.
"The funds were structured with the particular features that were ultimately designed to provide protection of the fund and for investors. We certainly need to make sure that there is education and appropriate understanding," he added.
In Blackstone's full year 2022 earnings call in January, CEO Steve Schwarzman told investors he was surprised by the "intense external focus on the flows for BREIT at a time of cyclical lows in stock and bond markets", noting the outflows are "highly predictable".
"Having navigated five major market declines in my career, I have learned that focusing just on what is happening at the bottom of cycles misleads the public regarding likely future trends for appreciation and growth in well-constructed and historically high-performing products," he said.
Barriers 'not insurmountable'
The dramatic turnaround in the performance of fixed income assets so far this year has stolen some of the limelight from private markets, as bonds are offering the best yields in over a decade and their role as a diversifier has returned, to some extent.
Despite this, Blackstone maintains its conviction that financial advisers should consider private markets for diversification, opportunities for greater income or yield appreciation and a different volatility to traditional asset classes.
"Whatever the underlying asset class, be it in real estate, private credit or private equity, there is a very important opportunity for the portfolios that financial advisors manage on behalf of their clients to be diversified," said Dwight Scott, global head of Blackstone credit.
Hamilton Lane: Semi-liquid private markets funds lower access barriers for retail investors
It is estimated the average individual investor holds less than 5% of their portfolio in private markets, compared to around 30% for institutional investors and sovereign wealth funds.
Individual investors have traditionally faced significant barriers to invest in alternatives due to high minimum investments, illiquidity, a lack of access to higher-quality fund managers and cumbersome paperwork.
Scott said that although the barriers of entry for individuals are there, "they are not insurmountable". One such barrier is the high fees that come with investing in the private markets as an individual investor.
"By bringing scale to this market, we have also been able to bring a more institutional cost structure to [individual] investors. The retail market historically would have had a higher fee load or higher cost structure," Scott explained.
Myers added: "We are trying to provide the fullness of the investment performance, but with an attractive cost structure for the client, because ultimately, we know that net performance of our underlying funds is what is going to drive demand."
Minimum ticket sizes for Blackstone's retail funds vary depending on jurisdiction, but they can be as low as $25,000. Most closed-ended private market vehicles traditionally require investment assets of at least $5m, an amount beyond most individual investors' reach.