Wall Street’s private equity firms are raising an increasing share of their capital from individual investors, according to a new report. Such firms — which raise multibillion-dollar funds to buy entire companies — have traditionally relied on public pension funds and other institutional investors for their capital. These institutions are compatible with private equity because they can afford to lock away their capital for as long as a decade, the time frame often required.
But private equity firms increasingly see an opportunity in raising capital from individuals. In the first 10 months of this year, individuals with more than $1 million in investable assets provided 10 percent of the capital raised by private equity firms globally, according to Triago, a private equity advisory firm. By contrast, such wealthy individuals provided just 6 percent of the industry’s capital in 2008, according to Triago, which published the data in a report on Wednesday. (Triago gathers its data from funds it works with or has knowledge of, and extrapolates from there.)
Institutions are still the primary source of private equity capital, but some of the biggest firms now view individual investors as a potentially lucrative source of additional assets under management. When private equity firms gather more capital, they can earn more in management fees.
This shift comes at a time when institutional investors are wielding significant leverage, Triago noted in its report. Major institutions can sometimes demand, for example, that their money be placed in separate accounts that charge lower fees.
Individuals, for the most part, have no such bargaining power. To raise capital from individuals, private equity firms have established “well-oiled partnerships” with brokerage firms, Triago said. The report said that one major firm, which it did not identify, was raising 18 percent of its annual capital through these channels. A person briefed on the matter said the firm was the Blackstone Group.