Blackstone Group Inc. and Apollo Global Management Inc. delivered a simple message to Wall Street’s main regulator Tuesday: Private equity is stomping public markets, meaning mom-and-pop investors will endure inferior returns as long as rules keep them out.
Speaking at a Securities and Exchange Commission event, top executives at the firms stopped short of urging the agency to dial back restrictions. But they came armed with data showing all the ways retail investors have been left behind. Their arguments: private markets are here to stay, less-liquid investments like corporate debt perform much better than stocks and private equity produces bigger gains with less volatility than publicly traded shares.
“Private companies can now get ample funding and don’t need to do the IPO route” as early, said John Finley, Blackstone’s chief legal officer. “This is a fundamental change that regulators and the industry will have to deal with.”
Stephanie Drescher, Apollo’s head of client and product solutions, added that the shift away from public markets has benefited buyout funds through increased demand and better investment opportunities.
”The growth pales in comparison to that of the private markets,” she said, referring to the size of public markets in recent years. “You can see the continued interest from the community of investors.”
The comments come as the industry has a rare opportunity to get its hands on a chunk of the trillions of dollars in retail money that is now off limits because of decades-old rules. President Donald Trump’s de-regulatory agenda is sweeping through Washington and SEC Chairman Jay Clayton has pushed the agency to consider opening more private markets and deals to less-sophisticated investors.
Under current regulations, Apollo, Blackstone, Carlyle Group Inc. and KKR & Co. must mostly raise funds from the super rich, sovereign wealth funds and pension funds. The SEC has long been concerned about less-sophisticated clients investing in complex products and not being able to quickly get their money back, as private-equity firms typically lock up cash for years.
Blackstone’s Finley was careful to insist that any loosening of rules come with strong investor protections. He suggested offering retail clients access through regulated funds or via funds that already have a significant institutional investor base, allowing mom-and-pop investors to benefit from their due diligence.
“We have absolutely no interest in an expansion unless it’s done right,” he said.
The panel discussion, hosted by a new SEC industry advisory group, is the agency’s latest effort to deal with the mushrooming growth of private markets. In June, the regulator sought public feedback on what restrictions funds with retail money should face in investing in private equity and hedge funds.
In a related move, the SEC last month proposed changing some criteria that determines who’s sophisticated enough to invest in private funds. Those adjustments could also add to to the pool of people that can invest in private equity.