Background:
After part 2 of the Private Equity Mini series a few days ago, I wanted to focus on how to access the asset class as a private investor via the “normal” capital markets.
Currently, the PE industry and the broader “Private Asset” industry is massively trying to lure private investors into its Fund offering via a variety of “NEW” and usually structured instruments, such as “ELTIFS” in Europe or lobbying hard in the US to get access to private investors.
In the past, Private Assets, including its subgroups like Buyout, Venture, Growth, Infrastructure and Private Credit were “exclusive” to larger institutional investors and Ultra High Net Worth individuals.
These days, with declining commitments from those traditional investors, the PE industry now tries to access the vast pools of money that smaller, private investors collectively own.
Often you hear the pitch that now is the time to “democratize” the asset class, which is an expression that should make the targeted investors extremely nervous. I had linked to the excellent Bain PE report already in one of the link collections.
A key slide of the report is the one that shows that for the Buy-out category, 2024 was the first year ever with declining AuM:
Private Equity fundraising in Q1 2025 seems to look much worse so far than 2024 which was not great either. The just released Mid-year PE report from Bain shows a further slow down in Q2 2025, as most PE firms have been “liberated” from theri exit options.
No wonder they are looking for new victims errrrrr customers.
Nevertheless, in the coming weeks I just wanted to walk through four alternatives how individual investors can access Private Equity without any fancy new structures (if they really want to):
1) Stocks of PE Asset Managers
2) UK Private Equity Trusts
3) Listed Holding companies with significant PE exposure
4) DIY: Listed Stocks with large PE ownership stakes
- Stocks of PE/Private Asset Managers / General Partners (GP)
This is clearly nothing new to most investors that many of the biggest PE players have public listings. Just looking at the charts of the main listed US players, we can see that some of these players, especially KKR have performed spectacularly well over the last 10 years.
Blackstone was a first mover with a well timed IPO just before the GFC in 2007. After the GFC, many other peers followed, such as KKR in 2010, Apollo in 2011 and ARES in 2014.
KKR is the top performer, being a 10 bagger since it’s IPO. However, looking at the P/E ratios. part of the performance is clearly also a multiple expansion:
Economically, a stake in a PE Manager is something like a “leveraged bet” on the performance of the underlying portfolios. A P/E manager typically charges 2% management fee plus a performance fee which is usually something between 10-20% above a hurdle rate of 8%.
Famous US self-help guru Tony Robbins got so excited about these assets that he wrote a whole book about it (and of course promoting a specific offering).
In the old times, as a rule of thumb, the management fee covered the cost of the operations (PE guys don’t come cheap), the profit comes from the performance fee (after the individuals have gotten their share) which is naturally volatile. This is a graph of KKR’s net margins since 2010 which clearly shows how volatile their earnings have been in the past:
Therefore, stock investors were willing to only pay relatively low P/Es, but in the last few years, investors are happy to pay much higher P/E ratios.
This is maybe also due to the fact that many of the large players became “Alternative Asset Supermarkets” and have diversified their offerings into many areas, most notable Private Credit, Infrastructure and sometimes even Real Estate.
Next to the US players, there is also a relatively large range of European PEs listed, however most of them are much smaller than their American peers.
Here is a list of the largest players for US and Europe with some KPIs:
It’s pretty obvious that the US players are anything but cheap. The European players, especially the smaller ones look cheaper, but for all of them, expectations with regard to profit growth still seem to be very high and maybe too high.
It is also interesting how bifurcated 1 year and 3 year returns are for US vs. European players. On average, US players have been doing well over 1 and 3 years, European players with the exception of 3i really have struggled.
Over 10 years, most of the larger players have done quite well, KKR, Apollo and Ares plus 3i even exceptionally well. The last 6 months however don’t look so good. I guess that the “animal spirits” around the US election have somehow calmed down.
In the case of the big US players, diversification into other non-listed asset classes like Private Credit seem to have really paid off. All the big guys, who had originally started as “pure”” PE shops are now active in many areas.
This is for instance a nice slide from KKR’s Investor presentation that shows that traditional buyout P/E is now rather a smaller business line with regards to fees:
Another way of looking at this chart is the following: The fact that KKR outperformed the S&P 500 as a stock is maybe not due to its superior performance in the underlying funds but in its ability to attract vastly more customer assets over the past few years.
The Insurance play at Apollo and KKR
Among the larger players, especially Apollo and KKR are standing out as having incorporated “boring” insurance companies into their mix.
Apollo was a frontrunner in building up Athena, an Annuity insurance company that invests mostly in Private Credit. There is a very good “invest like the best” Podcast episode with one of Apollo’s bosses who describes the business model quite well.
Looking into Apollo’s latest Q1 report we can see that “Spread related earnings” which in my understanding are the insurance earnings, are almost 60% of Apollo’s operating earnings. So Apollo is actually more an insurance company than a traditional Private Assets AM.
KKR’s insurance earnings seem to be smaller, only around 25% of total operating profit.
The FT recently had a great article describing the shifts in strategy at Apollo and KKR, whereas Blackstone still runs the “old style” model without its own balance sheet.
This chart nicely shows the Implicit leverage for the top 3 players and how they have developed very differently from each other only over the last 4-5 years:
Tough time for the smaller players
For the smaller players, things will get more difficult. As mentioned, Fundraising is becoming more expensive and takes longer. There is already a consolidation taking place in the PE space. In addition, traditional Asset Manager, such as Blackrock try everything to break into the Alternatives market with large acquisitions like GIP and Private Debt manager HPS.
There is of course also an ETF for this: The iShares Listed Private Equity UCITS ETF.
Over 5 years, the listed PE companies ETF (yellow) has outperformed the S&P 500 and also Blackrock, the maybe most successful large mainly “listed” Asset Manager Blackrock:
No wonder that Blackrock wants to get into the Private Game, too.
However, over a longer period, it looks a little different, although of course a lot of players have been listed less than 10 years:
If one believes in a further bright future of the Private Equity / Private Asset Management industry, I guess the ETF would indeed be a pretty decent instrument to gain exposure to the sector, although as mentioned above, the large players have become quite expensive.
Special Cases I: 3i & Eurazeo
One interesting special case in the list of PE Asset Managers above is 3i, the UK based firm. 3i’s track record is clearly outstanding. However, its business model differs from the traditional PE funds who manage mostly 3rd party capital insofar as they manage mostly their own balance sheet capital.
To make it even more special, a significant part of the investments consists of one asset: A majority stake in fast growing retailer Action. 3i claims to have made 160x their money on this which looks like quite a good investment.
This track record also potentially explains why 3i as an investment vehicle is trading significantly above NAV, which we will see in the next episode, is quite unusual for PE investment vehicles.
The FT had a longer article on 3i & Action last year which also mentioned that short sellers have been circling around 3i because they believe that a 18x EV/EBITDA valuation of Action might be too high, so far with little negative impact.
Eurazeo, another European PE AM with a Balance sheet, trades at 0,6X NAV despite having an additional 3rd party business. The reason for this is most likely a pretty underwhelming performance of it’s portfolio:
Intuitively, I would be more attracted to the 60 cent on the dollar opportunity, but I will look at some similar opportunities in the next episode.
Special case II: Petershill Partners
Another interesting “special case” is Petershill Partners, a listed company operated/spun-off from Goldman Sachs. The company is actually a “fund of PE manager stakes”, owning minority stakes in some mid-size PE managers but also other Alternative Asset Managers.
At a very first look, the stock looks quite cheap, but hasn’t performed that well since it’s IPO/Spin-off:
This slide from the IR presentation shows the split:
Around ⅔ of Petershill’s exposure is toward Private Equity. Overall, I find it a quite interesting alternative to a basket of the highly priced “direct” players.
The question clearly is: Why is this asset trading so cheaply, at only 60% of NAV ? My guess is that the structure and the numbers are not super easy to digest. Additionally, for some reason, the vehicle is only listed in the UK and doesn’t even seem to be a member of the listed PE ETF mentioned earlier. Finally, the free float is quite small with Goldman owning/controlling almost 80% of the shares.
Nevertheless, I do think Petershill might warrant a deeper look (or two). If I have time, maybe also Eurazeo and Tikehau could be worth a second look.
Summary:
in a nutshell, Investing in a basket of PE Asset Managers gives decent exposure to the sector, but valuations seem to be stretched at least at the moment for the big US players, despite the recent pullback in share prices.
Investing into the shares of the big players or the mentioned ETF gives an easy and pretty clear path to exposure to Private Assets. The only “drawback” is that as liquid assets, the values fluctuate more than typical PE investments that only get marked to market quarterly with a quarter delay.
Economically, I think this is a very simple and efficient way to get economic exposure to the sector and I am not sure why investors would want to invest into complex retail structures that are not very transparent and charge pretty hugh fees.
If the Alternative guys manage to convince a majority of private investors to sell their low fee ETFs and switch into high fee Alternatives, they might grow for a long time. However I have my doubts if this will be as successful as they think.
2) UK Listed PE Trusts
In the UK, there is a tradition that almost any unlisted or listed asset class gets repackaged as an open ended fund or “Trust”
Citywire gives us in principle 13 different listed PE Trusts. I have chosen 7 of them that actually hae at least 5 year history and a PE focus.
Here are the NAV discounts and Performance Numbers (NAV & Share price):
What we can see is that all 7 trusts trade at a discounts, on average a whopping -36% to NAV. We can also see that for the past 3 years, NAV performance but especially Price performance was quite weak on average.
5&10 years still look good, but the last 3 years look really bad. My interpretation is as follows: Most PE funds have “smoothed” over negative 2022 performance. However, as Private Equity is mostly small- to midcap focused, they couldn’t participate in the large cap rally of 2023 and 2024.
3 years is also a quite unfortunate time horizon, because this is the usual intervall at which the PE funds try to raise new funds.
I am not here to give investment advice, but if you desperately need PE exposure, this list might be the place to look at as a retail investor, especially those with a still decent NAV performance but still a big discount (ICG & CT).
There are clearly issues with the UK Trust model in general, but this clearly shows that the market as such does not deem Private Equity funds as attractive investments, which is kind of interesting regarding the high valuation of the GPs.