Carlyle Group, KKR and other private equity firms target individual investors with interval funds

Weighing the pros and cons of the new registered funds

Jun 23, 2016 @ 1:05 pm

By Jeff Benjamin

The powerful appeal of private equity investments has helped some of the biggest names in the space quietly move down market with products aimed specifically at individual investors, which presents some new challenges and opportunities for financial advisers.

Bluechip PE firms, including The Carlyle Group, KKR, and Partners Group, have started rolling out registered funds to give accredited individual investors exposure to an asset class that is considered one of the best sources of growth for pension funds.

The so-called interval funds are unique for private equity because they offer periodic liquidity in an asset class that is historically known for lock-up periods of between five and seven years.

There are currently less than a dozen of these funds on the market, with more already in registration.

Even though the funds are registered under the Investment Company Act of 1940, and some are also registered under the Securities Act of 1933, they should not be confused with traditional open-end mutual funds.

For starters, they are limited to investors with a net worth of at least $1 million, even though the minimum investments can start as low as $25,000.

Other key distinctions include higher fees and limited quarterly redemptions.

“You're on the road toward something that looks like a normal security, because its registered and there is some sort of liquidity,” said Bob Rice, chief investment strategist at Tangent Capital.

“Private equity has historically been the ultimate in illiquidity,” he added. “But as it's being brought into the mainstream there are more opportunities for advisers to put clients into an asset class that has historically represented the highest growth potential inside institutional portfolios.”

James Maloney, vice president of public affairs at the American Investment Council, described private equity investments as the “best-performing asset class inside defined benefit retirement plans over the past decade.”

Net of fees, he said private equity allocations inside defined benefit plans generated 12.2% annualized 10-year returns through June 2015, the most recent performance data available.

A large part of that performance advantage, according to Mr. Maloney, is tied to the trademark illiquidity that gives portfolio managers the ability to operate free of redemption fears or other cash-management-related challenges.

“The flexibility of the private equity model involves having patient capital that does not need to be deployed at any particular time,” he said.

Even though the registered interval funds might be luring investors with the promise of limited liquidity, it isn't likely to represent enough liquidity to radically hamstring portfolio managers the way managers might be effected in traditional open-end mutual funds.

Consider, for example, the Altegris KKR Commitments Fund, which has raised $130 million since its July 2015 launch.

The minimum investment is $25,000, and there is no liquidity for the first two years. After that the fund offers to tender 5% of the fund's assets on a quarterly basis.

“We keep telling investors, if they are looking for liquidity this is not the place to put your money,” said Jack Rivkin, chief executive and chief investment strategies at Altegris Investments.

The fund, which has a total expense ratio of 1.75%, is up net of fees 4.5% since inception, which compares to a decline of 1.7% by the S&P 500 Index over the same period.

“The average private equity fund has historically had an annualized premium over the public markets of between 3.5% and 4%, and I see no reason why that wouldn't continue,” Mr. Rivkin said. “Investors in public market buy and hope, activist investors buy and suggest, and private equity firms buy and fix.”

While it is true that private equity owners tend to be more actively involved in their various portfolio companies, including taking seats on corporate boards, the expectations of ongoing outperformance might be an overstatement.

“If you're wondering whether private equity is the right place to allocate assets right now you only have to look at the valuations in the public markets,” said Dick Pfister, founder and chief executive of AlphaCore Capital.

“There's been such a demand for private equity over the last five years that the valuations of private companies have ballooned up just like the public companies,” he added. “The PE firms have grown assets, as well, and they're just as susceptible to overpaying as the guys in the public markets.”

However, Mr. Pfister added, the PE managers have the advantage of being able to ride out markets fully invested because of the illiquidity provided the fund investors.

“Sometimes the illiquidity can help investors,” he said. “In a market selloff, if investors have liquidity they're be more likely to sell at the bottom.”


What do you think?

View comments

Recommended for you

Upcoming Event

Apr 30


Retirement Income Summit

Join Mopedia at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Many investors and advisers want to make a difference with their investments. This means ESG investing is about telling the right stories to the right investors who want to make a difference. Vanderbilt's Stephen Distante, offers his perspective.

Video Spotlight

Sponsored by Prudential

Recommended Video


Latest news & opinion

Finra notes compliance pitfalls in first-time release of exam findings

Broker-dealer self-regulator summarizes deficiencies on areas including product suitability, cybersecurity

Senate tax bill changes for pass-throughs more generous than House version, experts say

Senate measure's handling of such small-business income is simpler and makes allowances for more service companies.

Wentworth buys Purshe Kaplan Sterling

Holding company seeks to acquire more IBD shops as M&A deals continue to heat up in 2017.

Woodbridge bankruptcy burns advisers and real estate investors

Luxury developer in SEC fraud investigation leaves elderly investors without monthly dividend.

Two workplace retirement savings bills introduced in House

The legislation would require most employers to offer a defined contribution plan and simplify some retirement savings rules.


Subscribe and Save 60%

Last News

register for cfp exam what are the tax benefits of owning a rental property does bank of america own merrill lynch vgmpx usaa cornerstone fund h&r block fees tax preparation charles schwab 500 index fund vanguard international share index fund life insurance ira t rowe price health fund sptn sm cap idx adv dow jones graph 100 years life settlement investments pros and cons what is danny the counts net worth using a roth ira for college savings how much do morgan stanley financial advisors make state of florida department of insurance licensing converting non deductible ira contributions to a roth non deductible ira contribution limits 2014 social security death benefits for widows is social security deduction pre tax can a wife get social security on husband primerica long term care mary jo white wiki galliard stable value fund symbol tiaa cref lifecycle index raymond kelly net worth social security rules for divorced spouses microsoft stock dividend yield wash sale capital gains average social security income for seniors 401k hardship loan requirements prudential financial consultant salary charles schwab ira fees social security locations in miami