Alternative asset managers targetting retail investors: Fitch

In a recent report, the rating agency suggests that the growing role of retail investors in managing their own retirement assets is driving alternative asset managers, including most large private equity firms, to expand their capital-raising strategies. And, Fitch says it sees "the development of new retail-oriented investment vehicles as a key source of asset manager growth".

Indeed, it says that private equity firms are now going beyond "high net worth" investors to also target so-called "mass affluent", or ‘Main Street' investors — the sorts of investors that have not traditionally been on their radar.

Fitch notes that this shift in focus is a necessity as defined benefit pension plans, which have historically been one of the largest sources of capital for private equity firms, are gradually being replaced with defined contribution plans and self-directed savings efforts.

Many private equity firms have already attracted capital from retail investors, it says. "Publicly traded vehicles, such as business development companies, closed-end funds and ETFs all served as initial points of entry into the retail space for alternative firms," it says, "while total capital from these vehicles is relatively small to date, we expect product innovation to open up additional retail channels in the coming years."

Indeed, it notes that private equity firms are developing products that will allow individual investors to allocate retirement funds to alternative investment strategies within their retirement plans.

At the same time, Fitch says this trend may also lead to increased regulatory scrutiny, additional operational complexity, and different reputational risk considerations for private equity firms.

"While we expect retail investors to account for a larger share of assets under management over time, expansion into this new limited partner base will need to be managed carefully and will come with material product development costs," it says.

Fitch notes that retail investor sophistication varies widely. "Complicated fund terms, high management fees, fund under-performance and a lack of product liquidity could lead to negative attention for fund managers, potentially limiting their ability to raise new capital. The risks of a regulatory response would also rise in such a scenario," it says.