BlogMainPrivate Equity’s Growing Interest in Retail Investors: A Strategic Shift Amid Capital ConstraintsPrivate equity (PE) firms are increasingly looking toward retail investors as an essential source of capital. Blackstone’s recent expansion of its private wealth business in Europe is one of many moves by major firms to reach this largely untapped audience. With its retail-focused investment products managing approximately $250 billion in assets—around 23% of its total holdings—Blackstone has offered retail investors access to PE and private credit opportunities since 2011. This trend highlights a wider industry shift as PE firms compete for capital in an environment where institutional dollars are no longer guaranteed. Yet, despite the promise of retail capital, retail investors still approach private equity with caution, weighed down by concerns over liquidity, volatility, and changing economic conditions.Private Equity’s Growing Interest in Retail Investors: A Strategic Shift Amid Capital Constraints

Why Retail Investors?

Retail investors represent a vast majority of global assets under management, a share projected by the World Economic Forum to reach 61% by 2030, up from 52% in 2021. However, only a small fraction of retail assets are currently allocated to alternatives like private equity—16%, according to Bain & Company. Recognizing this gap, leading PE firms, including EQT and Apollo Global Management, are positioning retail investors as a key growth avenue.

The appeal of retail investment is especially strong as firms seek new capital sources. Institutional allocations to alternatives are expected to grow at 8% annually over the next decade, per Bain & Company. Yet, this pace may be insufficient to sustain the double-digit AUM growth that PE firms aim for.

Several factors have intensified the push for new capital sources. The recent rise in interest rates has slowed the flow of institutional capital, as bond investments become more attractive in a high-interest environment. In 2022, the collapse in public market valuations left pension funds and endowments overexposed to private equity. Simultaneously, poor exit markets have limited the return of capital, which would normally be reinvested. According to PitchBook’s Q3 2024 U.S. PE Breakdown, capital raised this year is on track for the lowest total since 2020, with a 17.6% decline compared to the previous year. The number of new funds launched in 2024 is projected to be the lowest in over a decade, highlighting the urgent need for fresh capital.

The Appeal of Private Equity for Retail Investors

Retail investors are increasingly drawn to PE for the diversification benefits and potential returns it offers. Over the last few decades, the number of publicly traded U.S. companies has halved, from more than 8,000 in 1996 to around 4,500 in 2023. This shrinking market makes it difficult for retail investors to access the range of high-growth opportunities available in private markets. PE provides a route for diversification beyond public markets and appeals to investors looking for opportunities that deliver higher returns.

Despite some recent fluctuations, private equity has generally outperformed most other alternative asset classes. For example, while PE’s one-year horizon internal rate of return (IRR) dipped to 8.7% in Q1 2024, this still compares favorably to other assets. Responding to the need for liquidity in retail-focused products, Blackstone’s BXPE fund and KKR’s retail fund have adopted structures that allow for quarterly withdrawals, addressing some concerns about the traditional illiquidity of private equity.

Retail Investors’ Caution

Despite the benefits, retail investors have shown a level of caution toward PE. A survey by the Financial Planning Association found that only 16.83% of financial planners recommended PE to clients this year, down from 23.04% in 2023. Unlike institutional investors, retail investors tend to have shorter time horizons and may be uncomfortable with the decade-long lock-ups often associated with PE funds. Additionally, they are more accustomed to the liquidity offered by publicly traded assets and may hesitate to commit to long-term investments, especially during periods of economic uncertainty.

Higher interest rates and inflation have further dampened retail investors’ enthusiasm for alternative assets. Bonds, which were previously unattractive, have become more appealing in a high-interest environment, particularly as private equity returns, while still competitive, have softened slightly.

To address these concerns, PE firms are developing new products that incorporate limited liquidity options. Blackstone’s BXPE fund, for example, allows collective withdrawals of up to 3% of the fund’s net asset value each quarter. These solutions offer some flexibility, but retail investors may still find the trade-offs between liquidity and higher returns difficult to navigate.

Building Infrastructure for Retail Investors and Institutions

While retail interest in PE is expected to increase, particularly as these investors seek returns in a market with shrinking public options, PE firms and institutions will need to offer more than access. Retail investors require a streamlined, highly accessible infrastructure that can introduce them to the world of private equity seamlessly. They need intuitive, cost-efficient solutions that cater to their distinct financial goals, risk preferences, and investment horizons.

Institutions, meanwhile, must develop and maintain tools, data frameworks, and operational efficiencies to effectively serve retail clients across multiple regions, adapting to varied regulatory environments. The future of private equity will depend on bridging this gap—creating a cohesive, global system that simplifies retail participation in PE while ensuring compliance, transparency, and performance across borders. Only then can the industry unlock the true potential of retail capital, creating a mutually beneficial pathway for investors and firms alike.