What a sign of the times. KKR, the venerable private equity house, is to target the hoi polloi with two new funds covering high-yield credit and distressed opportunities. Now anyone with as little as $2,500 (U.S.) can invest in a KKR fund. It is a far cry from the height of the private equity boom when only those with the biggest cheque books could get a piece of the action. KKR's fee income dropped 22 per cent in the first nine months of the year. Managing money for the man in the street offers more reliable earnings.
KKR is not the only private equity house casting the net wider in search of money to manage. Others are offering bespoke services for sovereign wealth funds, creating client-specific investment vehicles for them. A survey from Coller Capital suggests that 13 per cent of investors in private equity have such special accounts, much to the chagrin of other investors, who say the trend creates conflicts of interest.
The rush to diversify comes as raising money from traditional sources has become increasingly tough. The industry raised $309-billion last year, according to Preqin, less than half the amount raised in 2008. That is partly down to a lack of exits. If investors cannot get their money out of old funds, they cannot recycle it back into new ones. Over $200-billion was realized through exits in the first half of 2011, but that fell to $129-billion in the same period this year.
But the industry could do more to help itself, not least by accelerating its move away from the traditional "2 and 20" fee model (2 per cent annual management fees and 20 per cent of any profit above a threshold). A 2-per-cent management fee is chunky, especially for an illiquid asset class about which many people are skeptical. Add in 20 per cent carried interest and that skepticism rises. No wonder private equity executives are wearing out the shoe leather looking for new money.