The head of product for Capital Group, the parent company of American Funds, sees a day when private market investing will sit comfortably alongside equities and fixed income in an advisor’s investment toolkit, according to comments she made at BNY Pershing’s annual INSITE conference in National Harbor, Md.
“If you consider that private credit is a $1.7 trillion market, it’s really just another sector,” Holly Framsted, head of product group for Capital Group told the audience at INSITE on Wednesday.
However, Framsted acknowledged a number of stumbling blocks for registered investment advisors and their clients to get to that state. She said she and her team studied those areas in-depth when they were considering a fund for RIAs looking for alternative-like exposure and decided to partner on a public/private fixed income investment product with private equity firm KKR.
Doug Krupa, head of global wealth solutions for KKR, also expressed high hopes for private market investing in the retail wealth management sector, even suggesting the term “alternative” should be eliminated as the vehicles become more normalized.
He said KKR helped create the space by working with institutional investors, including pension funds—the very type of investment vehicle that is diminishing and being replaced by investor-held portfolios, 401(k)s and IRAs.
“Our largest L.P. [limited partner] base is pensions,” he said. “But these days, more and more, individual investors are controlling their financial destinies. They’re working with intermediaries. They’re working with advisors. So we’ve been sort of maniacally focused on bringing our investment capabilities and transforming them in a way that makes more sense for individual investors and advisors.”
Krupa said KKR is so focused on wealth management that his team has grown from a handful of people to around 150. Meanwhile, the firm is targeting funding from private wealth to grow from about 10%-20% of new capital to 30%-50% of overall fundraising over the next several years.
“We’re really focused on that last mile,” Krupa said. “We brought it down from big institutions to the wealthiest families, then down to about the $5 million level, then on to the credit investor level, but that’s still only about 15% of households.”
Capital Group and KKR are not alone in broadening the client base for private market investing. Blackstone, Apollo and BlackRock are raising money for illiquid funds and other alternative vehicles. Meanwhile, State Street and Apollo have launched a target-date fund with private exposure designed for everyday retirement investors.
All of these firms, however, are seeking to get around stumbling blocks that have limited the use of private or alternative investments by advisors despite more product offerings.
Framsted and the other panelists noted the tax filing for private market investing, called Schedule K-1, that can be time consuming and cause delays. The team’s investment was designed as an interval fund to get around that, which can be reported as income through the usual 1099 tax filing.
“That eases the burden of delaying tax filings, and that’s a simple solve,” she said.
Framsted said they also had to try to solve for the lack of liquidity or withdrawal capability from private investments. By making the funds a combination of liquid public and private investments, the firm is offering 10% quarterly liquidity rather than what would normally be a 5% quarterly liquidity for an interval fund, she said.
Finally, she also mentioned solving for the higher fees often associated with private investments. The solution with KKR carries fees of 84 to 89 basis points, depending on the strategy.
“When we think about some of the features that we think were holding financial advisors back, we believe we’ve solved the vast majority of those,” Framsted said.
BNY Pershing worked with Capital Group and KKR to put the fund on its platform.