Suburban Millionaires Beware — Private Equity Needs You

Blackstone Inc.’s private equity fund for wealthy individuals is a harbinger of two trends that many expect will transform investment management in the next decade. The first is getting a class of investors called “mini-millionaires” or “suburban millionaires” into alternative investments, and the second is pushing private equity for retail investors.

A century ago, “millionaire” meant “rich.” With mansions selling for $50,000, yachts for $10,000, servants paid $500 a year and Harvard University charging $200 per year for tuition, someone with a million dollars could live very well. Today that entire first million won’t get a mansion, or even a single-family home in some neighborhoods. It could take $50 million or so to put you in the category of a 1923 millionaire.

It was people in the $50 million and up wealth range who bought the hedge funds of the 20th century. Only later did institutions like pension funds and endowments get interested, driving growth in alternatives in the 21st century. As this investor base gets saturated, many alternative managers are looking to the $5 million to $50 million population — the mini-millionaires — for future asset growth.

About 12% of American households have at least $5 million of wealth, but that is misleading. Few people are born with $5 million. Most mini-millionaires are people over 55 who earned between $150,000 and $250,000 in their peak earning years and gradually accumulated wealth. Back-of-the-envelope calculations suggest that more than half of households headed by one or two college graduates will reach the $5 million level before retirement, plus many small business owners and others who did not graduate college — or as much as 30% of US households.

That answers the question of why Blackstone and other alternative asset managers are interested in mini-millionaires. If Blackstone can get an average of $1 million each from 1% of 40 million households, that’s $400 billion, about a 40% increase in its assets under management. And that’s just US investors. Moreover, private equity relies on cheap leverage, and higher interest rates are limiting institutional investors’ appetites for the strategy, making it more urgent to find new fields to plow.

The logic for the industry is clear, but does private equity have a place in the portfolios of mini-millionaires?