An Innovative Vehicle for the Final Frontier

2023.01-ALTI-Final-Frontier-social1Retail investors have historically and unfairly been denied the opportunity to enjoy the benefits of private equity investing. With a new spin on the ‘40 Act fund structure, the team at ALTI and its partners have developed a vehicle that will allow accredited investors to access the types of high-quality deals that traditionally have only been available to institutions. ALTI is committed to its mission of democratizing private equity, what many consider to be the final frontier for individual investors looking to gain exposure to alternative asset classes.

According to a recent report by Bain & Company, since the turn of the century “private market capital has grown at more than double the rate of public capital, and, at the moment, there’s no slowdown in sight.” The number of publicly-traded companies has decreased by 45% over the past 20 years, and businesses are preferring to stay private, or postpone public offerings, for a number of reasons. Chief among them are the financial and regulatory costs of IPOs, as well as a desire by management teams to remain focused on long-term goals over maximizing near-term quarterly profits.

Across market cycles, private equity as an asset class has consistently outperformed broad-based public equity indices. CalPers, for example, has stated that private equity has been its best performing asset classes over trailing 10- and 20-year periods[1]. In addition, KKR forecasts private equity expected annual returns will be 12.8% over the next 5 years, the highest of any asset class.

Although private equity demand is increasing, for both its return potential and diversification benefits, 99% of the public remains unable to access this lucrative asset class. This unfair situation has been made worse by the ongoing shift in retirement accounts from defined-benefit plans (institutional investment vehicles that can access PE) to individual 401(k)s and IRAs, which are subject to qualified investor rules and are for the most part restricted from direct investments in private equity. In 2018, the CFA Institute concluded: “it is not credible to allow an entire generation of retail investors to be left with only diversified public market exposure to generate retirement returns, while institutional investors crowd into innovative business models that offer potentially higher returns.” 

Regulators have also begun to acknowledge that individuals have long been disadvantaged by being left out of private equity opportunities and are now advocating for practical solutions to expand access. Over the past decade, the democratization of private credit, real estate, and alternative strategies in the hedge fund space have helped pave the way for regulators to grow more comfortable with new structures relating to private equity. ALTI has leveraged its strong legal team and collaborated directly with the SEC to create a unique ‘40 Act product that offers an institutional-quality private equity experience to retail investors.

ALTI and its partners have developed a ’40 Act vehicle that combines features of a tender offer fund with those of a term-life fund, giving the product the look and feel of a typical private equity fund while at the same time eliminating many of the pain points that an individual would have with a traditional fund, including capital calls, cash drags, and potential dilution from later funders. These are issues which we will examine more closely in future blogs.

The democratization of private equity has been stalled by a range of issues that have not been adequately addressed by most of the current universe of ’40 Act funds. While the first generation of funds provided access to a wider audience, the majority were exclusively for Qualified Purchasers and not Accredited Investors. Additionally, demand was not as strong as anticipated due to high all-in costs and liquidity expectations that could not be met given the limits of the fund structure and the underlying investments

Unlike interval fund managers who aim to provide liquidity to retail investors at the expense of returns, ALTI’s philosophy is that private equity investments involve executing value creation plans that require many years to realize, and that financial advisors and their clients should adopt the same long-term mindset for the capital they allocate to ‘40 Act funds. With the introduction of an innovative structure that overcomes these obstacles, the democratization should come much sooner than many people expect.