Recent stock market volatility has put a spotlight on the large, listed alternatives managers whose share prices have dropped over the past six months to hover at or below their listing prices.
Take the Carlyle Group. Its shares were trading at $11.70 on 12 February, down more than 50 percent from $24.28 six months ago. Apollo Global Management’s shares have followed a similar trend, falling more than 38 percent to $12.60 on 12 February, from $20.94 six months prior. This is an industry-wide phenomenon, not just a reflection of any particular firm.
One reason for the battered valuations is the market’s belief that the private equity industry is entering a more difficult cycle. After strong distributions for the past couple of years, investors are now taking the view that credit woes, high dry powder levels and a less buoyant initial public offering market, mean distributions and returns are bound to fall.
We asked a number of LPs whether market sentiment and PE firm share volatility was concerning them. Not so much whether the capital losses were material, but whether they were anxious about management distractions with the shareholder base or team stability, given some executives may be significantly incentivised with their firms’ listed stock.
Not really, was the reply. US and European LPs stressed their long-term views on investing and noted that these firms have all been building the proper infrastructure to deal with being listed – typically with separate management teams in place to address the relevant investor bases.
More interesting, some suggested, was whether courageous retail investors will take advantage of the volatility to gain exposure to private equity at attractive entry points.
Obviously, being a listed shareholder isn’t the same as being a limited partner in a firm’s funds. And investing in the stock market comes with its own risks. But since most individual investors don’t have access to private equity funds, unless they are accredited investors (more on that shortly), buying shares in firms’ management companies may be the next best thing, particularly if they hold the stocks long enough to ride the next PE cycle.
That said, it may become a little easier for individuals to commit to private equity funds after the US House of Representatives voted to expand the definition of accredited investors.
Currently, general partners can solicit commitments from individuals whose net worth is at least $1 million, not including a home; from someone who has earned at least $200,000 per year in the past two years; or someone whose household income has totalled at least $300,000 per year for the past two years.
The new definition would also include anyone who is registered as a broker or investment advisor or – and this is where things get interesting – has professional knowledge of a particular investment based on their education or experience.
If the bill passes the Senate – and once the Securities and Exchange Commission develops some kind of test to gauge that professional knowledge – it suggests that doctors could potentially invest in healthcare funds, for example, or farmers commit to agri-focused vehicles.
While it would take time for these potential developments to take have a real impact – be it retail investors piling into alternatives stocks or more diverse individuals making fund commitments – they’re a reminder that the evolution of the investor base is set to continue.