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Focus on the individual

Private Equity Real Estate by Nancy Lashine

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Gathering large sums of capital from individual investors can be challenging, but some firms are finding ways to do so, says Nancy Lashine, managing partner at Park Madison Partners. Until recently, Regulation D of the Securities Act of 1933 limited asset managers’ ability to market alternative products to individual investors, many of which lacked awareness of the investment options in this space. With the JOBS Act lifting the ban on general solicitation and advertising, more individual investors are becoming aware of alternative investment products, often as a result of solicitation by online platforms, and they want access to these offerings.

Why the focus on individual investors? Defined benefit pension plans and other collective
retirement pools have for years represented a significant portion of private equity real estate
investment activity. DB plans, however, no longer constitute a majority of retirement assets in
the United States.

In 1985, DB plans constituted 69 percent of all US retirement assets. Today, however, nearly 56
percent of retirement assets – approximately $14 trillion – are concentrated within individual
retirement accounts and defined contribution plans, according to estimates from Investment
Company Institute. The ability to efficiently access this growing pool of capital has the potential
to transform the fundraising landscape for alternative investments.

Although some investment managers have developed or are developing real estaterelated
products for the DC market, to date it has been a challenge to aggregate large sums of
individual investor capital. Investment managers frequently cite the fragmentation of the
individual investor market as a significant barrier to entry, as achieving economies of scale is
difficult. Several firms, however, have successfully positioned themselves as intermediaries for
the individual investor community, creating more centralized marketplaces to capture this
investor demand.

For example, PENSCO, an alternative asset custodian, has developed a specialized niche
within self-directed Individual Retirement Accounts (IRAs), which allow more flexibility for owning
alternative assets. PENSCO currently has over $10 billion under custody on behalf of more than
45,000 IRA clients. Approximately half of PENSCO’s custodied assets are real estate-related.

PENSCO recently conducted a survey of its investors, with 62 percent of respondents indicating
that they have either increased their allocations to alternatives or have plans to do so, with real
estate remaining a popular asset class among survey respondents.

There have also been efforts to broaden access to alternatives to individuals who bank with
smaller Registered Investment Advisors (RIAs). RIAs will readily admit that their clients want
more access to alternative products, but local and regional RIAs often do not have the
infrastructure or the distribution bandwidth to provide it. These RIAs tend to have around $100
million of AUM across several hundred clients, most of whom cannot meet the minimum ticket
sizes to invest in institutional quality private equity vehicles. Furthermore, forming a conduit
vehicle to aggregate smaller orders is an expensive process, and generally not economical for
smaller RIAs to do themselves.

This dilemma has created an opening for online platforms to offer illiquid alternative
investments through conduit vehicles, which can aggregate smaller ticket sizes into a larger,
more institutional-sized order. One such firm is iCapital Network, an online platform focused on
providing greater access to blue chip alternative investment products, including private real
estate, to the RIA and family office community.

Upon selecting a manager, each RIA or family office user can log in to iCapital’s online portal
and download offering documents. For high demand funds, iCapital can form a conduit vehicle
to aggregate small orders, often as low as $100,000, from a disparate group of investors into
one single subscription for the fund. This approach helps to overcome the two main obstacles
that individual investors normally face with alternative products: access and minimum size. In
2015, iCapital processed approximately $300 million of fund commitments for a range of
energy, private equity, venture capital, and hedge funds.

The alternative investments industry has been dominated by institutional investors for several
decades. However, individual investors are becoming more aware of alternative investment
options, and a combination of technology and changing regulation are providing additional
points of access. Individuals, whether through their self-directed retirement plans, target-dated
funds, or personal investment accounts will have increasing opportunities to invest in low-fee
alternative vehicles. That is good news for private equity managers that are looking to access
this growing pool of capital.

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