The latest such deal has resulted in the launch of two public-private investment solutions in the US – each packaged as an interval fund with a 60 per cent investment in public fixed income and 40 per cent in private credit – aimed at enabling retail investors access to private markets traditionally reserved for institutional investors.
Namely, this week, Capital Group and KKR announced two “best-in-class” public and private market exposures after first publicising their venture last year.
While they join a growing trend of retail-investment partnerships such as BlackRock and Partners Group, Blackstone and Vanguard, and Apollo and State Street, the pair are taking the concept further by creating a new category of hybrid public-private investment solutions.
Commenting on the launch of their inaugural funds, Capital Group CEO Mike Gitlin said the firm – which has been present in Australia since 2011 – is working on “the best way” to bring public-private solutions to clients outside the US.
“Expanding access to private markets is much more than two public-private credit solutions. A joint, cross-company project team is already working on public-private equity solutions,” Gitlin said.
“We’re discussing how we can bring public-private model portfolio solutions to our clients. We believe there is a role for private market solutions in retirement, including target date strategies.”
However, as with any private credit funds – or in this case, semi-private – that involve retail investors, concerns have arisen about the potential risks these exposures may pose to both investors and the firms launching them.
In a statement to InvestorDaily, Marc Pinto, global head of private credit at Moody’s Ratings, said while private credit is clearly “coming to Main Street”, and creating a potential multi-trillion-dollar capital raising opportunity for private credit sponsors, risks are inherent in the process.
“As evidenced by a surge in new types of funds with low investment minimums, the question is no longer if private credit will come to a broad swath of retail investors – it is how quickly,” Pinto said.
“However, retailisation comes with new risks for this illiquid asset class.
“If these funds fail to perform as expected, asset managers may become subject to class action lawsuits as well as draw the ire of regulators.”
Late last year, when State Street and Apollo first publicised their exchange-traded fund (ETF), Moody’s predicted the private credit universe could grow to some US$3 trillion over the next three years as major partnerships continue to be struck between the two sides of the investment aisle – including with traditional banks.
Spurred by the prospects of this immense growth, Moody’s ratings highlighted at the time that asset managers are increasingly competing to establish themselves as comprehensive financial hubs, catering to a diverse clientele ranging from retail investors to sovereign wealth funds.
Morningstar, too, entered the public-private market debate last October, with its fixed income strategist noting that SEC approval of the Apollo-State Street ETF could “open the floodgates” by making the most inaccessible parts of the market suddenly accessible.
“That’s a huge shift,” Brian Moriarty said on a podcast.
Joining him, PitchBook’s executive vice president of research, Nizar Tarhuni, acknowledged the scepticism around private equity managers’ motives for forming these partnerships.
He noted that alternative managers are eyeing retail capital partly for self-interested reasons, as institutional capital hasn’t kept pace with the sector’s explosive growth.
Expounding on this further in a subsequently published article, Moriarty said the State Street-Apollo venture is “sure to be just the first of many private-market ETF proposals”.
He noted that such ventures, including the one struck by Capital Group and KKR, is ultimately an attempt to capitalise on investor demand for private assets.
