October 25, 2023 •

Individual investors, by contrast, represent a deep reservoir of untapped riches. They had an estimated $178 trillion worldwide as of 2020—and just 1% of that was devoted to alternative assets, according to a September KKR investor presentation. Fidelity and Schwab provide firms like KKR entree to those on the lowest rung of the private wealth sector: the so-called mass affluent.

The brokerages offer access to individual retirement accounts at a time when retiring baby boomers are shifting their nest eggs into IRAs from employer-sponsored savings accounts such as 401(k)s. That’s a promising trend for hedge funds and private equity firms because IRAs have far more leeway to invest in alternative assets.

“The amount of money that is in IRAs is the largest pool of liquid capital on Earth,” said David Himmelreich, a senior vice president at Wealth Enhancement Group. “It is getting more and more important” to private equity firms, he said.

Schwab and Fidelity are listed alongside Morgan Stanley Smith Barney and Rockefeller Financial in regulatory filings as potentially receiving compensation through a private placement by KKR Infrastructure Conglomerate.

KKR, Schwab and Fidelity declined to comment on the entity, one of two flagships created to raise money from rich individuals. The other is KKR Private Equity Conglomerate.

The two conglomerates have raised more than $2 billion combined since May, according to Kevin Gannon, chief executive officer of Robert A. Stanger & Co., an investment bank whose specialties include alternatives such as non-listed real estate investment trusts and business development companies.

Accredited Investors
While Schwab and Fidelity have spent decades courting the mass affluent—people with $100,000 to $1 million to invest—it’s only recently that private equity firms such as New York-based KKR have sought to tap their savings.

The two conglomerates mark the first time that KKR has directly opened its infrastructure and private equity deals to accredited investors, a category that generally includes the mass affluent. KKR plans to draw 30% to 50% of its new capital from the private wealth sector, up from about 15% now, Chief Financial Officer Robert Lewin said in a February conference call.

The effort will get a boost as investors increasingly shift money from 401(k) plans—an arena that private equity has lobbied to enter with only limited success—into IRAs.

Savers in the U.S. rolled almost $780 billion into IRAs from 401(k) accounts and other retirement plans last year, according to calculations by Cerulli Associates, which forecasts the annual figure will reach $900 billion by 2028. Rollovers accounted for most of the $1.7 trillion net increase in IRA assets between 2017 and 2022, said Cerulli analyst Elizabeth Chiffer.

The trend stems from the “baby boomer migration into retirement,” she said in an email. It makes more money available to invest in private funds because the rules governing IRAs are less restrictive than those that govern employer sponsored retirement plans.

People changing jobs mid-career also account for some of the rollovers.

‘Really Scary’
Financial advisors are key to gaining access to the billions of dollars flowing into IRAs. People at or near retirement age typically delegate investment decisions concerning their IRAs to these advisors instead of handling the portfolios on their own.

“We are seeing more and more people come in and they will say ‘I have managed my money for years and years and I was pretty satisfied with it,” said Malcolm Makin, president of Westerly, Rhode Island-based Professional Planning Group, a registered investment advisor—or RIA. “‘But things are getting really scary out there now, and I want to be sure it’s done right.’”

Schwab and Fidelity serve as gatekeepers to RIAs, who oversee a large portion of the $9.7 trillion now sitting in IRAs.

The two brokerages provide custodial services to most RIAs in the U.S. and also manage platforms that allow alternative-asset managers to make their funds available to these advisors.

Schwab and Fidelity are paid fees for providing such access, which is partly why they’re listed as receiving compensation through KKR Infrastructure’s private offering, according to people familiar with the matter. The brokerages will also be paid for administrative services, the people said.

Raising money through independent RIAs requires a lot more work than going to the private banks that cater to high-net-worth investors, said Gary Ribe, chief investment officer for Accretive Wealth Partners in Parsippany, New Jersey. That’s because the money managers must contact each individual RIA to seek capital.

“The RIA community is tough to crack into, because when you have met one, you have only met one,” Ribe said.  “But if you go to a large private bank, it’s a lot easier to make big sales to multiple advisors.”

Berkshire Hathaway
KKR created the conglomerates during the past year with help from Rajib Chanda, a Simpson Thacher partner who, according to the law firm’s website, has been hailed as a “trailblazer” for his legal contribution to the “democratization of access by ordinary investors to private market investments.”

The model they used resembles Warren Buffett’s Berkshire Hathaway Inc.

The conglomerates were formed as operating companies rather than investment funds, meaning they’re direct owners of actual businesses and hard assets—such as toll roads and airports – instead of securities and shares of other funds. They’ll directly co-invest in buyouts and infrastructure deals through joint ventures with the main private equity and infrastructure funds that KKR runs for institutional investors.

As operating companies, the conglomerates also qualify for exemptions from rules that would otherwise cap the amount of IRA money they can take in at 25% of net assets. While this structure has been previously used by the likes of Brookfield Infrastructure Partners, whose shares are publicly traded, the major PE firms are just now starting to adopt it. In June, Apollo Global Management Inc. filed documents for an infrastructure entity that’s in many ways identical to KKR’s.

“The idea is to have products that people can access without having to meet very high net-worth requirements,” said Joshua Lichtenstein, a benefits partner at Ropes & Gray in New York, noting that he was commenting about a general trend rather than a specific offering. “Democratization really means retail access.”

This article was provided by Bloomberg News.