While private equity has not the greatest public relations reputation with Main Street, or Washington, the advent of evolving regulations and increased access provides private managers with a public opportunity to refine their brands and improve trust.
Institutional investors have accessed private equity with gusto for many years as they recognize the illiquidity premium that comes with investing in private markets, upping those allocations to 66% from 57% over four years.
For retail investors, that have been historically under allocated to alternatives and well below some of the suggested 11-15% recommended allocations of the large RIAs, these new channels of access are bringing with private equity new avenues to communicate and for many private managers a chance to revitalize or reinvent their image. Though with it comes an opportunity to fully educate investors on why private equity or alternatives and why now.
Private equity is being democratized
With KKR being the latest entrant into the mass distribution of its private equity strategies to accredited investors with its tie up with iCapital this month, and its push to democratize PE to a wider and less educated investing marketplace, we are witnessing just another step in the gradual creep of bringing private investments to the public investor market.
The advent of the amendment of the accredited investor rule by the Securities and Exchange Commission (SEC) under Jay Clayton in late 2020, added to the creep of private to public and followed the JOBS Act of 2012 that gave hedge fund managers more opportunity to advertise and be more open with their dialogue with the press and the materials they can post on their websites.
With the latest change, the rule has updated and improved the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in those markets. Allowing individuals to participate in private capital markets not only based on their income or net worth, but also based on established, clear measures of financial sophistication.
The SEC expects the total pool of individual investable assets to rise from $70 trillion in 2018 to $106 trillion in 2025, while average allocations for individual investors are less than 5% to alternatives, compared to 27% for pension funds and 29% for endowments.
Against this widening investor base, these new offerings create an opportunity for private firms to go to public markets and embrace a level of publicness around their communications that reflect these investment offerings as not just creatures of Wall Street, but are creatures of main street, the media, bloggers, congress, and the government.
With these new lines of product and services communication blurring, private managers and other sponsors have been given an opportunity to educate and inform newer investors about how their investment products and how they work, why an investor should buy them, where they fit in their asset allocation mix and the inherent risks they are taking relative to other public or private available investment options. Alternative investments are typically sold not bought.
In essence they are being given an opportunity to communicate more like a mutual fund manager – proactively. Though as mutual funds have been doing this for years and in both channels, adding a communications strategy for a whole new audience is no easy thing and takes a lot of thought to do it correctly. It also requires increased levels of transparency, something that might put some private firms off to begin with.
To launch or not to launch? That is the question
For many private sponsors, especially traditional hedge fund managers, the rules and the environment have never lent itself to allow these managers to tap the larger high net worth market and an audience outside its traditional institutional audience.
However, as the one constant in life is change, in June 2020 by the U.S. Department of Labor, which governs 401(k) retirement accounts, clarified that under federal law DC pension plan fiduciaries the ability to incorporate certain private equity strategies into diversified investment options, such as target-date funds. Analysts at Evercore estimate that as much as $400 billion in new assets, out of the $6.5 trillion 401(k) market, could make its way into private equity funds.
Though for many established private managers, to launch or not to launch is a big question. If you do you should have a communications and marketing strategy to support that initiative.
The days of “no comment” are over: Blurred lines of communication?
Just because you can does not mean you should. Though if you do, it is imperative you have the right communications plan in place to back this up. The traditional “no comment” is not going to cut it.
When working to roll out the launch of Franklin Templeton’s first liquid alternatives offerings, which came about through the acquisition of K2 Advisors, an established fund of hedge funds with a 20-year pedigree and a client base of almost 100% institutional investors, getting the story straight as to why a traditional hedge fund of funds would pair up with a mutual fund shop and bring institutional hedge fund strategies to the masses was a story that needed some finessing before going to market.
While Franklin’s multi strategy alternatives product was one of the fastest fund raises in the mutual fund company’s history, much of this success would not have been garnered without having the right investment teams in place with the right pedigree, distribution, and the right messaging.
In support of that public facing effort a proactive media messaging strategy including the development of message platforms, microsites, whitepapers, podcasts, manager interviews, social media posts and ongoing media engagement were all implemented as they should be to support that new business line. Though a difference maker for K2 Advisors was having the breadth and depth of Franklin that had been communicating with mutual fund investors for 70 years. A lot of private firms don’t have that sort of bandwidth they can turn on with a flick of a switch.
It is not all about brands: Set out your stall
Going into public markets, medium sized private firms especially face a myriad of challenges as, with one of them being brand recognition as many investors are just not aware of their existence.
While the large private shops will face less headwinds in this regard, medium sized shops should think bigger.
Though with adversity comes opportunity. While an anathema for many private managers that have been reactive in the private world to the press, a well-established earned media strategy focused on your core firm messaging can go a long way to establishing trust and building your brand especially with allocators that have yet to meet you in person, and essentially punching above your weight when compared to the big brand name media spends.
While as a journalist at Institutional Investor myself I was always looking to speak with the bigger brand mutual fund and alternative managers for stories on the industry, I did find that some of the best sources of information and insights came from smaller shops that were essentially punching well above their weight on a media budgeting basis, though had some good insights or were willing to work on their narratives and educational tools to help facilitate a better understanding of their products and services with the earned press.
Biggest is not always the best. The key to competing with larger private and established public facing managers is to have a focus and a keen understanding of your products and services and a recognition as to how they serve their end audience. Your utility.
From my experience quality always trumped quantity of pitches and building established relationships with the press can be an immensely powerful tool, paired with the right message, especially when you are setting out your stall and trying to explain why an investment strategy deserves an allocation over a comparative option.
Ultimately, managing mutual fund assets and public money is difficult at the best of times, though it takes a completely different skillset to manage private assets. While not all private investments are created equally, it is important for any private manager that is looking to add a new line of business, especially to investors outside of their normal client base to ask, “why now?” and “why us?”.
Discovery of answers to those questions can be difficult and require some soul searching as to whether as a firm you are set up to competitively compete for capital with some of the bigger brand names, though if the stars are aligned there is a lot you can do from initiating a well-designed, earned media strategy, especially similar to mutual fund managers that have been doing this for years.