Private equity continues its assent as an asset class, notching record inflows and summiting $3.6 trillion in capital under management, according to EY’s 3Q Private Equity Pulse. This trajectory could be set to continue given two relatively new sources of capital: insurance and retail investors.
The Securities Exchange Commission’s Asset Management Advisory Committee’s September report is one indicator of future tailwinds for the space. It’s non-binding recommendation that “the SEC should consider permitting retail investors access to a wider range of private investments,” shows regulatory tailwinds could be changing to facilitate direct retail participation. “While the recommendation is nonbinding, it represents a broader push to allow more investor access,” writes EY global private equity lead analyst Pete Witte in the note.
Insurance represents an even more promising opportunity for the industry given the proven ability of permanent capital to translate into fees. Together with potential retail inflows, an additional $110 trillion in assets could be in play for a private equity industry already awash in cash.
We are approaching a tipping point when the composition of the largest private equity players’ fee-related earnings (FRE) derived from perpetual capital vehicles is so substantial it can offset the periodic FRE declines between flagship fundraisings. The upsides include high management fees, higher operating margins, and a reduction in net redemption risk.
Perpetual capital also provides a strategic edge in auctions, no small point in today’s competitive field. All else being equal, founders prefer to sell to a long-term investor who might be driven less by near-term exit considerations, 3i’s co-head of North America private equity Andrew Olinick tells Mergers & Acquisitions.
Insurance and retail capital could represent a win-win, providing financial sponsors with higher fees as investors gain exposure to the industry’s historic returns.