Real estate investment managers seeking capital have traditionally tried to catch big fish and bypassed smaller fry. But increasingly these types of funds are adjusting their appetites and a growing cohort of fund managers, general partners (GPs) and private equity sponsors are launching funds and products aimed to luring in accredited investors.
Global investment management firm Nuveen is one example of this trend. Nuveen already has some $1 trillion in assets and $220 billion in alternative assets under management, and the firm is hoping to leverage capital from accredited investors to grow further. It recently announced an expanded partnership with iCapital Network that will leverage iCapital’s customized technology, service, advisory and distribution solutions to more efficiently reach investment advisors seeking access to real estate and private capital offerings for their clients. The solution is designed to overcome many of the long-standing pinch points to raising capital from individuals by automating the subscription, administration, operational and reporting processes across the life of the investment. In addition, earlier this week, UBS Group AG joined with Envestnet Inc. and iCapital Network to launch what they are calling the Alternatives Exchange "where high-net-worth investors and advisers will be able to browse, purchase and sell private investments such as real estate, hedge funds and private equity," according to a Bloomberg report.
The iCapital solution makes it easier for financial advisors to access alternative investments and take advantage of the return and diversification potential for their individual investor clients, notes Keith Jones, global head of alternative investment products at Nuveen. “Beyond providing a selection of Nuveen funds, iCapital provides automation that eases the investing and servicing processes of these investments for our wealth management clients,” he says. The majority of Nuveen’s private funds are now available to accredited investors. However, access also depends on the individual vehicle. For example, some funds are specifically designed for off-shore investors or for qualified investors that do not meet the level required for accredited investor status.
The focus on accredited investors and qualified purchasers has increased over the last decade with rapid acceleration in the past three to four years. “We are seeing more and more interest from our GP clients in raising capital from individual investors, and we’re seeing more appetite from individuals who want to invest with these GPs,” agrees Mike Mendelsohn, a principal at Hodes Weill & Associates, a global real estate advisory firm that provides consulting services and also does capital raising on behalf of asset managers.
Hodes Weill recently served as the sell side advisor for Black Creek Group in its sale to a subsidiary of Ares Management Corp. Ares has made no qualms about the fact that it is highly interested in expanding into the retail segment, and the Black Creek transaction gives them a window into the retail channel, notes Mendelsohn. “So, I would expect that we will see more of that happening, whether it is asset managers building out their own distribution capabilities, or strategic transactions that add access to retail clients and distribution channels,” he says.
Lucrative target market
Although institutions will always be a major focus for the larger asset managers, momentum has clearly shifted away from pension funds and defined benefit (DB) plans and more in favor of defined contribution (DC) plans. “While pensions continue to allocate more of their portfolios to alternatives and will remain important clients to asset managers, the pace of growth of pension assets may be slowing over the next 20 years. So, there is an opportunity here for asset managers to diversify their asset base with retail investors,” says Mendelsohn.
The percentage of workers covered by a traditional DB pension plan has been steadily declining over the past 25 years. From 1980 through 2008, the proportion of private wage and salary workers participating in DB pension plans fell from 38 percent to 20 percent. In contrast, the percentage of workers covered by a DC plan increased from 8 percent to 31 percent over that same period, according to the Bureau of Labor Statistics. “Asset managers also are waking up to the fact that the retail world is a significantly larger pool of assets than the institutional world. So, it represents a very big market opportunity for managers to scale their AUM,” says Mendelsohn.
As recently as five years ago many of the managers that iCapital worked with were exclusively focused on raising capital from institutional sources, such as public and private pension funds, insurance companies, endowments and family offices. Now there is a huge shift in managers that either have already added resources to raise capital from the private wealth channel or are interested in learning more about it, agrees Dan Vene, co-founder and a managing partner at iCapital Network. Although, there is still a tremendous amount of capital available in institutional channels, investment managers are taking a long-term perspective on their business and thinking about the potential contribution of different channels to their overall fundraising, he says.
Likewise, there is growing demand and increasing sophistication on behalf of individual investors interested in increasing allocations to real estate. “We find this trend is being driven by investors who have faced a prolonged period of low yields and have to reach across a broader risk spectrum, such as real estate and private equity, to generate alpha to meet long-term financial goals,” adds Jones.
Tough nut to crack
The pool of accredited investors can be a difficult market to tap with access that is hindered by a number of factors, including lack of liquidity in investment vehicles and extra effort on up-front education, as well as structural and regulatory issues. Oftentimes, it takes the same amount of work to wrangle an institutional investor that is committing $50 million to a project as it does someone who has $50,000 to invest.
Part of the solution has involved creating interesting and creative investment structures that also made sense for individual investors due to different liquidity needs and investment time horizons. Technology also has been a game changer in making it feasible to raise capital from accredited investors. For example, iCapital is providing tech solutions to streamline administrative processes and aggregate capital from individual investors for hundreds of GPs. Solutions range from creating marketing modules within customized white label websites, webinars and video road shows to administrative duties such as client onboarding, documentation associated with Know Your Customer/Anti-Money Laundering rules and managing capital calls and distributions.
Technology is allowing for straight-through processing of investors at scale with a much higher degree of efficiency and accuracy. “It’s not just technology for the front-end client experience that we have built, but there is technology through the entire ecosystem that is connecting different fund administration partners, transfer agents, custodial and performance reporting platforms,” adds Vene. That first phase of connecting participants was completed about three years ago. The next phase is providing more analytics to fund sponsors, so they understand how their capital raising is progressing, as well as providing portfolio analytics and portfolio construction tools to individual investors. Those tools will give individual investors a better view of their exposure to alternative assets and the role that alternatives play in their broader investment portfolios, he says.
The ability to aggregate investor capital comes with the added benefit of lowering minimum investment amounts, which makes these real estate investments more obtainable for accredited investors. “You have seen a lot of those barriers to entry come down, and we’re now in this interesting dynamic where institutional asset managers are seeing the opportunity to access long-term sticky retail capital,” says Mendelsohn. At the same time, retail investors are significantly under-allocated to alternative asset classes including private equity, private real estate and other real assets as compared to institutions. “So, accessing retail investors provides an opportunity for institutional asset managers to really move the needle in terms of growing AUM at a faster pace,” he says.