Small but mighty

At the second annual PERE Global Investor Forum in Los Angeles this week it was as clear as the blue skies overhead that investors continue to hold the upper hand over their investment managers. The California sun, however, seemed to shine even stronger on one particular type of investor: the small type.

During a panel discussion focusing on small investors on the second day of the conference, a comment from one speaker said it all: “Even though we’re small, we think we can move the needle.”

The power of small investors shouldn’t be underestimated, especially when you consider the fundraising muscle behind some groups. One panelist said family offices, for instances, can be like 'mafias'.

The thesis goes: although an individual investor only may be able to write a $500,000 check to an investment manager, that investor is likely to be patched into a network of both small and larger investors. Its experience will have a ripple effect that would be noticed by other investors.

If a manager performs well, that investor could help to bring in 20 other small investors that could someday back the same manager. That type of herd investing could prove to be a quicker or more efficient way of pooling capital than waiting on the approvals associated with larger institutional investors.

The topic of small investors cropped up throughout the conference. During another panel discussion, one speaker noted that lead investors in a fund don’t necessarily have to be massive institutions. It was argued a knowledgeable and well-respected small investor or group of small investors can wield as much influence as a large investor, particularly when it comes to investing in emerging managers or niche strategies.

Indeed, in many cases, small investors are investing alongside giant institutions and receiving the same terms. In fact, some investors that only have been able to commit $5 million to a fund have been granted a seat on the manager’s board.

In some circumstances, however, it could backfire for a small investor to think and act like a large investor. One delegate observed that high sensitivity to fees has compelled some smaller investors to seek direct real estate investments. Predictably in such instances, the question of whether these investors have the staff and resources to manage direct relationships arises. If they do not, that could lead to poor investment decisions that ultimately could hurt returns. Another panelist, meanwhile, noted some small investors have taken their manager requests too far in terms of the level of due diligence and could shut themselves out of a fund, even one that is undersubscribed.

Nevertheless, the growing power of small investors cannot be ignored. Not unlike the strong gusts that blew through the City of Angels this week, these investors have been gathering force, and people are taking notice.