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Private Equity

Why It’s Time to Expand the Private Equity Investor Pool

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If PE has a stereotypical individual investor, it’s a 60-something Caucasian male who has been accredited for a while. It’s not an unattractive market — there’s a lot of investment knowledge and capital there — but it’s notably limited. Only 31% of Americans are white males, and a little more than 3% of American households are millionaires. Some simple arithmetic suggests that a lot of the PE marketing energy targets less than 1% of the entire population.

Recent research from Spectrem Group, a consulting firm, found that there are more than 10 million American households with more than $1 million in investible assets. And even though the average age among those millionaires is 62 years, one-fifth of them are millennials (between 20 and 33 years of age in 2015). A slightly smaller number are considered “Generation X,” or those between 34 and 50.

Yet most private equity firms focus on investors older than 50, partially because millionaires over 50 are more likely to be accredited (although a Texas Tech study found that younger accredited investors know more about investing and much older investors score much worse on financial literacy tests).

New Crowdfunding Rules

In order to be a limited partner to a private equity in the United States, an investor used to need $1 million on hand, excluding the primary residence. To participate in any top-level equity sourcing, investors likely needed an accredited investor distinction.

Not anymore.

In 2015, the Securities and Exchange Commission voted to implement Title III of the JOBS Act, a momentous change that largely went unnoticed. Now, equity crowdfunders have the ability to include non-accredited investors.

The inclusion of non-accredited investors is long overdue. Not only are there plenty of exemptions and exceptions that the wealthy can use to go around Regulation D and other securities laws, but, as a Boston University paper correctly points out, accredited investors aren’t necessarily more sophisticated.

Finding New Money (and Saving Millennials from Cash)

Even though the private equity market is expected to attract a record $629 billion in 2015, there’s still approximately $250-300 billion sitting in cash or credit balances in margin accounts. Billions more have probably been lazily dedicated towards traditional markets, without consideration for poorly or narrowly marketed private equity opportunities.

Millennials in particular are skeptical of old-school investment platforms. The traditional advisor relationship is facing rapid disruption from robo-advisors and other do-it-yourself technologies. Most saw their parents or grandparents struggle with the devastating securities market collapse of 2008-09. The investment firm Natixis Global Asset Management surveyed millennial investors, concluding that millennials:

  • Anticipate lower returns than previous generations;
  • Are more open to alternative investment strategies, specifically noting private equity;
  • Are the “least bullish stockholders” and have a curious trust of cash as a viable holding option; and
  • Want to retire earlier than other generations and profess a willingness to accept risks to get there.

The signs for opportunity are clear. Private equity has a strong case to make to an entire generation of successful Americans — especially one that considers cash as a core holding. Private equity performance, though oft-maligned, probably outperforms the stock market.

Millennials aren’t the only potential new target. The Chinese securities and real estate markets collapsed in August and Europe continues its years-long stagnation, prompting record amounts of foreign capital to look for a new home. There’s also a lot of so-called “shadow capital,” or money that bypasses traditional fund managers, that lacks a mature, pluralistic home in private equity.

Real Estate Firms Stand Out in Efforts to Expand the PE Investor Tent

The private equity community is making a mistake by not appealing to a broader, more dynamic pool of investors. Perhaps just as importantly, investors almost certainly want, and probably need, new ways to access securities, real estate, and capital markets.

It’s time for the PE community to step up, embrace the future, and begin to change its narrative in the process, says Richard Kaplan. Kaplan is President and CEO of Syndicate Equities, a Chicago-based real estate investment firm that’s working to expand their investor base. Syndicated Equities is actively attracting foreign and domestic investors from a multitude of backgrounds and open doors to new audiences.

“The premise is simple and approachable,” says Kaplan. “Allow individual investors to own a fraction of institutional quality real estate,” the kind that is “normally reserved for large REITs, well-capitalized insurance giants, or uber-wealthy foreign investors.” Kaplan’s team is convinced that private equity firms need to transition into younger and less traditional demographics.

Reaching millennial millionaires will likely require a different tact. “We are trying to become more mobile and electronica,” says Kaplan. “Not only with our offerings but with our investor relations — letting them log into our website and see how their investments are performing. Millennial investors will demand this.”

Syndicated Equities isn’t the only company making taking the broader approach. There are notable competitors in the crowdfunded real estate space, including RealtyShares Inc. in San Francisco and Origin Capital Partners in Chicago. These firms, along with other forward-thinking PE companies, can help move private equity out of its perceived shadowy existence.

Finding New Solutions

“New equity crowdfunding platforms are providing a gateway to alternative investments that have historically been difficult to source and almost impossible to access. Until now, investors needed a million dollar check and an existing relationship or personal connection to an investment manager in order to invest directly in anything other than a startup.” – Marcus New, Founder and CEO of InvestX, writing on the topic of alternative investments.

Companies can now ask younger, well-to-do investors to dip their toe in non-traditional platforms —  perhaps something like Syndicated Equity’s upscale student housing apartment development in Carbondale or InvestX’s techy Spotify and Spacefy mobile service company deals.

New registered investment portals with the SEC will go into effect on Jan 29, 2016. We may be on the verge of a new era of Mom & Pop equity deals. These will undoubtedly put downward pressure on margins (at least in the long run) but it also means that a PE company can diversify both its investor base and its portfolio — after all, less wealthy investors are likely to have different tastes and accepted returns.

It’s difficult to estimate how much new capital this avails to opportunistic firms, but we can be reasonably sure it’s a very big number. Now, private equity companies can source deals with shockingly low minimum contributions and shockingly large numbers of new contributors.

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