Retail push can complement traditional funds

This article is sponsored by Davis Polk.

For sponsors that are embarking on a foray into retail products, what are some of the key considerations to take into account?

Christopher Healey: There are a lot of buzz words swirling around the market right now, from permanent capital and evergreen vehicles to specific types of products such as business development companies (BDC), interval funds and tender offer funds.

What is crucially important from a sponsor’s point of view, however, is to focus on an investment strategy where you have a successful track record and then map that onto the various product wrappers that are available for retail investors.

Being thoughtful about ensuring that fit at the outset can help to significantly improve the likelihood of success when it comes to selling the product on the backend.

Oran Ebel: I would add that just because a sponsor raises an evergreen fund, it does not necessarily follow that that fund needs to be offered to retail investors, although that has obviously been done with spectacular success in recent years.

In addition to understanding what the sponsor’s strengths are, sponsors also need to consider who they want to sell to and how they are going to market the products. Do they want to raise a permanent capital vehicle for institutional investors, or for bona fide retail investors? Do they have a greater ability to access one or the other of those buckets, or can they access both?

It is not only about their investment strategy, but also about what they are realistically able to sell, and to which end market.

What are some of the differences or challenges that a sponsor accustomed to managing more traditional institutional funds should be aware of when launching a retail product?

CH: The term retail can mean different things to different people. It can mean a qualified purchaser, an accredited investor, or it can mean the true ‘mom and pop’ or ‘main street’ investor. Figuring out what you are trying to solve for and for whom is critically important.

Sponsors thinking about launching a retail product also need to consider what additional staffing they are going to require on the legal and compliance side. An area that is often overlooked is the financing and accounting function. With legal and compliance, professionals with relevant experience in other types of products can usually learn what is needed as they go, but it is incredibly helpful to have someone with dedicated expertise in that finance role, and so that is where hiring an additional resource might become necessary.

Andrew Ahern: I agree that there is a significant amount of additional administrative work involved in running these products that the sponsor should be aware of. It is a different source of capital from raising another private fund. We are seeing more and more interest from sponsors of all sizes in these products, and it is important that they invest in their internal resources upfront to be adequately prepared.

Some would say private credit has so far led the way in terms of product development and fundraising for retail investors. What private market strategies will come next?

Leor Landa: One area where we are seeing a big push is with secondaries. Tens of billions of dollars of secondaries retail funds have been raised over the past couple of years, to the point where it is starting to reshape the secondaries market. I do not see any reason why that will slow down.

OE: We are also seeing a focus on private equity, particularly in relation to qualified purchasers. In addition, real assets, encompassing both real estate and infrastructure, are experiencing a big push.

I think real assets sometimes feel more acceptable to retail investors from a conceptual perspective. They like the idea of financing something tangible, whether that means buildings or bridges, toll roads or solar plants. On the same theme, in private credit we are starting to see a move into more asset-backed strategies.

AA: These products are also a good fit for real assets because these products tend to work well with long-dated asset portfolios. We are seeing increasing interest from managers in evergreen vehicles (whether or not they are planning to access retail capital), and those strategies with longer hold periods can be a better fit.

The traditional 10-year, closed-end fund life simply does not map well onto certain types of real estate and infrastructure strategies, and I expect that we will see more creative fund structures used to solve for some of those incompatibilities.

What regulatory or other hurdles need to be addressed in order to raise the ceiling on expanding private markets access to the masses?

CH: On the regulatory side, there…