Alternative investments, such as venture capital and private equity funds, have long been out of reach for mainstream American investors. Now, however, industry leaders and regulators are increasingly floating the idea of opening these markets to retail investors, among them Stephen Schwartzman, Chairman and CEO of private equity giant Blackstone Group.
Schwartzman went on record supporting regulated measures to broaden private market access to Americans who hold 401k funds, when speaking before the Economic Club of New York today.
Particularly amid the low U.S. interest rate environment of the past decade, private markets provided more conservative capital allocation and higher returns, Schwartzman noted.
Voicing similar support for small investors last week, SEC Chairman Jay Clayton also told the Economic Club of New York that he favored measures to “increase the type and quality of opportunities for our Main Street investors in our private markets.”
Some of these measures have already been introduced through the existing “alphabet soup” of securities regulations. These include Regulation Crowdfunding, which allows companies to raise up to $1.07 million through public crowdfunding during a 12-month period; expansion of Regulation A, which allows for some exemptions from the Securities Exchange Act of 1934; and the allowance of general company solicitation and advertising of investments for Rule 506 offerings under Regulation D.
Revealing that his agency was taking a “fresh look” at this existing framework, Clayton said last week that his staff is trying to determine whether new fund structures could allow Main Street investors to access private markets in a way that “ensures incentive alignment with professional investors—similar to our public markets—and otherwise provides appropriate investor protections.”
In 2018, U.S. companies received $2.9 trillion in funding from private sources—twice the amount raised in public equity and debt markets, as reported in a recent Financial Times editorial.
Further, Schwartzman recalled that private equity investments had historically offered lower risk, higher returns, and the power to change problematic or inefficient companies from within.
He compared this favorably to the degree of influence in listed companies, where investors’ only available recourse against a troubled company is to sell their stock.
Matching retail funds with private companies is not without controversy, however. The nature of the private market, itself, begs the question whether less transparency, less regulation and less tradability make non-public companies at all suitable for the retail segment.
Moreover, the relative outperformance of private equity over public markets is, itself, open to interpretation.
And while Schwartzman pointed to potential market red flags due to excess private valuations for tech companies , it is worth noting that questions over the rich valuation of workspace real estate startup WeWork emerged as that company was preparing for an initial public offering. (In fact, the company shelved its IPO plans this week). This points to potential blind spots that private capital may exhibit in credibly valuing new companies, as well as the importance of listed markets in the price discovery process.
Finally, there is the issue of uninvested capital. According to numbers from Preqin, obtained by the FT, private capital funds have raised nearly $5 trillion since 2012, with uninvested private equity “dry powder” exceeding $2 trillion in 2018. With too much private money already chasing too few available investments, there seems hardly a pressing need to add retail money to a hoard of idle institutional cash.
Speaking more broadly on the macroeconomic outlook, Schwartzman said that the recent years’ low-to-no interest rate environment had become “a huge handicap” for developed economies, calling “too low [interest rates]” the “wrong way to go.”
“If banks can’t expand, they can’t extend credit to businesses, so these economies won’t grow at any meaningful level,” he warned, further prolonging an economic environment that “punishes regular people.”