stor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up pe

Alternative Investments Defined
Alternative investments cut a broad swathe across a number of nonpublic categories, such as private equity, hedge funds, venture capital, commodities fund and so on. Typically open only to accredited investors who have a minimum of $1 million in net financial assets, over the past several years, alternatives have earned higher returns than public equity markets. That kind of outcome has understandably raised alternatives’ profile as an attractive investment option.

It’s not surprising then, that large institutional investors and high net worth individuals have significantly increased their allocations into alternative investments. And, for the most part, they haven’t been disappointed. The evidence of public equity fund outperformance by alternatives, particularly in the private equity category, is impressive. According to the Greenwich-Van U.S. Hedge Fund Index and the Cambridge Associates Private Equity Index 3 Year Returns, U.S. Private Equity funds showed a 25% return, as compared to the nest highest Dow Jones Commodities Index with a slightly less than 15% return.

Reaping Returns, Driving Desires
Backed by clear evidence of strong overall returns, where the investment community once viewed alternatives with a good measure of skepticism, over the past decade, alternatives have gained favor as a viable investment option. According to the World Wealth Report 1997 – 2006, high net worth investors have more than doubled their allocations to alternatives over the past five years, which has further fueled the popularity of such investments, causing the average individual investor to clamor for their opportunity to get a seat at the table.

What’s more? Institutional investors have also seen equally dramatic results. According to Cambridge Consultants, the leading investment advisor to foundations, its clients’ allocations to alternative investments have increased from only five percent in 1991 to 25 percent in 2005. The significant increase has been driven by return performance. As foundations have discovered a boost in overall returns, it has buoyed their confidence in selecting alternatives as a viable piece of their investment mix.

In fact, in June 2006 The Chronicle of Endowments reported that as a result of higher allocations, larger foundations in particular “…earned returns that were more than 50 percent higher than those earned by small endowments…” Moreover, out of 130 endowments monitored, the highest returns were earned by those — Yale, Amherst, Harvard and University of Michigan — that had more than 40 percent of their assets in alternative investments.

Obstacles to Overcome
Sitting on the sidelines is not an enviable position for individual investors who must watch their high net worth brothers and sisters and high profile foundations reap the lip-smacking returns that alternatives offer. Yet, the restrictions are clear: the SEC prohibits individuals who do not qualify as accredited investors from investing in private opportunities.

Further, even those individuals who do qualify as accredited investors still face a few daunting obstacles:

• High minimum investment amounts. Minimum investment amounts for established funds run anywhere from $5 million to $25 million and up. Such a substantial investment is typically too large for many high net worth investors.

• Long tie-up periods and lack of liquidity. It is common for private equity and venture capital fund commitment periods to be as long as five to 10 years. Because individual investors often prefer to have access to their funds — for instance to buy a house or pay for a college education — they are generally reluctant to tie up capital for such long periods of time.

Fortunately, there is good news on the horizon. To address hurdles and restrictions that face both accredited and non-accredited individual investors, fund management firms have begun to adopt public structures that improve fund accessibility for more of the potential investor population.

New Strategies, New Options
Top among the emerging strategies, fund managers are pioneering new public structures that modify fund terms and conditions to improve accessibility for potential investors.

The most common strategy to date is to obtain a public listing through the formation of a business development company (BDC). In 1980, the U.S. Congress created the BDC structure to encourage the flow of public capital to private businesses. Of course, for governance and ethical oversight, BDCs must follow special rules, which include deriving more than 90 percent of their income from investment gains and loans, and then annually distributing at least that same percentage of income to shareholders.

By adopting the public structure, BDCs can sell their shares to the general public. Just as in buying shares in GE or IBM, there are no minimum net-worth or tie-up period requirements for investors. A testament to the effectiveness of the BDC model over the past decade alone, can be witnessed in the success of several mezzanine and debt BDCs, including American Capital, Gladstone Capital and Allied Capital. Through greater accessibility for individual investors — and in turn boosting investor confidence — these organizations experienced significant growth, reporting market capitalizations of several billion dollars each.

While the strategy has its proponents — and has demonstrated success in the public equity arena — the BDC model also has its drawbacks on the private equity side. In April 2004, based on foundation of $900 million, Apollo Investment became the first U.S. private equity fund to list a BDC. That move, triggered several additional private equity firms to file BCD formation requests with the SEC. The surge in interest however, quickly waned, and due to lack of investor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up per

s have more than doubled their allocations to alternatives over the past five years, which has further fueled the popularity of such investments, causing the average individual investor to clamor for their opportunity to get a seat at the table.

What’s more? Institutional investors have also seen equally dramatic results. According to Cambridge Consultants, the leading investment advisor to foundations, its clients’ allocations to alternative investments have increased from only five percent in 1991 to 25 percent in 2005. The significant increase has been driven by return performance. As foundations have discovered a boost in overall returns, it has buoyed their confidence in selecting alternatives as a viable piece of their investment mix.

In fact, in June 2006 The Chronicle of Endowments reported that as a result of higher allocations, larger foundations in particular “…earned returns that were more than 50 percent higher than those earned by small endowments…” Moreover, out of 130 endowments monitored, the highest returns were earned by those — Yale, Amherst, Harvard and University of Michigan — that had more than 40 percent of their assets in alternative investments.

Obstacles to Overcome
Sitting on the sidelines is not an enviable position for individual investors who must watch their high net worth brothers and sisters and high profile foundations reap the lip-smacking returns that alternatives offer. Yet, the restrictions are clear: the SEC prohibits individuals who do not qualify as accredited investors from investing in private opportunities.

Further, even those individuals who do qualify as accredited investors still face a few daunting obstacles:

• High minimum investment amounts. Minimum investment amounts for established funds run anywhere from $5 million to $25 million and up. Such a substantial investment is typically too large for many high net worth investors.

• Long tie-up periods and lack of liquidity. It is common for private equity and venture capital fund commitment periods to be as long as five to 10 years. Because individual investors often prefer to have access to their funds — for instance to buy a house or pay for a college education — they are generally reluctant to tie up capital for such long periods of time.

Fortunately, there is good news on the horizon. To address hurdles and restrictions that face both accredited and non-accredited individual investors, fund management firms have begun to adopt public structures that improve fund accessibility for more of the potential investor population.

New Strategies, New Options
Top among the emerging strategies, fund managers are pioneering new public structures that modify fund terms and conditions to improve accessibility for potential investors.

The most common strategy to date is to obtain a public listing through the formation of a business development company (BDC). In 1980, the U.S. Congress created the BDC structure to encourage the flow of public capital to private businesses. Of course, for governance and ethical oversight, BDCs must follow special rules, which include deriving more than 90 percent of their income from investment gains and loans, and then annually distributing at least that same percentage of income to shareholders.

By adopting the public structure, BDCs can sell their shares to the general public. Just as in buying shares in GE or IBM, there are no minimum net-worth or tie-up period requirements for investors. A testament to the effectiveness of the BDC model over the past decade alone, can be witnessed in the success of several mezzanine and debt BDCs, including American Capital, Gladstone Capital and Allied Capital. Through greater accessibility for individual investors — and in turn boosting investor confidence — these organizations experienced significant growth, reporting market capitalizations of several billion dollars each.

While the strategy has its proponents — and has demonstrated success in the public equity arena — the BDC model also has its drawbacks on the private equity side. In April 2004, based on foundation of $900 million, Apollo Investment became the first U.S. private equity fund to list a BDC. That move, triggered several additional private equity firms to file BCD formation requests with the SEC. The surge in interest however, quickly waned, and due to lack of investor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up pe

clear: the SEC prohibits individuals who do not qualify as accredited investors from investing in private opportunities.

Further, even those individuals who do qualify as accredited investors still face a few daunting obstacles:

• High minimum investment amounts. Minimum investment amounts for established funds run anywhere from $5 million to $25 million and up. Such a substantial investment is typically too large for many high net worth investors.

• Long tie-up periods and lack of liquidity. It is common for private equity and venture capital fund commitment periods to be as long as five to 10 years. Because individual investors often prefer to have access to their funds — for instance to buy a house or pay for a college education — they are generally reluctant to tie up capital for such long periods of time.

Fortunately, there is good news on the horizon. To address hurdles and restrictions that face both accredited and non-accredited individual investors, fund management firms have begun to adopt public structures that improve fund accessibility for more of the potential investor population.

New Strategies, New Options
Top among the emerging strategies, fund managers are pioneering new public structures that modify fund terms and conditions to improve accessibility for potential investors.

The most common strategy to date is to obtain a public listing through the formation of a business development company (BDC). In 1980, the U.S. Congress created the BDC structure to encourage the flow of public capital to private businesses. Of course, for governance and ethical oversight, BDCs must follow special rules, which include deriving more than 90 percent of their income from investment gains and loans, and then annually distributing at least that same percentage of income to shareholders.

By adopting the public structure, BDCs can sell their shares to the general public. Just as in buying shares in GE or IBM, there are no minimum net-worth or tie-up period requirements for investors. A testament to the effectiveness of the BDC model over the past decade alone, can be witnessed in the success of several mezzanine and debt BDCs, including American Capital, Gladstone Capital and Allied Capital. Through greater accessibility for individual investors — and in turn boosting investor confidence — these organizations experienced significant growth, reporting market capitalizations of several billion dollars each.

While the strategy has its proponents — and has demonstrated success in the public equity arena — the BDC model also has its drawbacks on the private equity side. In April 2004, based on foundation of $900 million, Apollo Investment became the first U.S. private equity fund to list a BDC. That move, triggered several additional private equity firms to file BCD formation requests with the SEC. The surge in interest however, quickly waned, and due to lack of investor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up pe

. In 1980, the U.S. Congress created the BDC structure to encourage the flow of public capital to private businesses. Of course, for governance and ethical oversight, BDCs must follow special rules, which include deriving more than 90 percent of their income from investment gains and loans, and then annually distributing at least that same percentage of income to shareholders.

By adopting the public structure, BDCs can sell their shares to the general public. Just as in buying shares in GE or IBM, there are no minimum net-worth or tie-up period requirements for investors. A testament to the effectiveness of the BDC model over the past decade alone, can be witnessed in the success of several mezzanine and debt BDCs, including American Capital, Gladstone Capital and Allied Capital. Through greater accessibility for individual investors — and in turn boosting investor confidence — these organizations experienced significant growth, reporting market capitalizations of several billion dollars each.

While the strategy has its proponents — and has demonstrated success in the public equity arena — the BDC model also has its drawbacks on the private equity side. In April 2004, based on foundation of $900 million, Apollo Investment became the first U.S. private equity fund to list a BDC. That move, triggered several additional private equity firms to file BCD formation requests with the SEC. The surge in interest however, quickly waned, and due to lack of investor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up pe

stor demand, did not move forward. In response to the troubles facing private equity BDCs, Edwin Pease, a partner with the Boston law firm of Brown Rudnick noted, “They became unmarketable because the initial investors in the offering had to shoulder the costs of the underwriting. It was flavor of the month, and it didn’t catch on.” (The New York Times, May 4, 2006).

Undaunted, firms have continued to seek means to allow individual investors to get into the high return investment game.

Consider the approach Kohlberg Kravis Roberts & Co. (KKR) took with its private equity fund. Rather than form a BDC, it took its fund public in May 2006, raising $5 billion (three times the original offering amount) on the Amsterdam exchange. Mark O’Hare, managing director for the London-based research firm Private Equity Intelligence, summed up the advantage for individual investors, “[Previously], if you want[ed] to get into KKR, you [had to] to have $25 million, and [it was] locked in for 10 years. But, [now] to get into one of [KKR’s] listed vehicles, you can buy shares tomorrow. It opens private equity up to a whole new group of investors.” (The New York Times, May 4, 2006)

A third private equity option attractive to individual investors is the open-end structure model. Rather than creating a public fund, fund management firms marry the high returns from private equity investments with the more flexible terms of an open-end fund After much shorter tie-up periods (one to four years versus five to 10 years for a closed-end fund), investors have the ability to liquidate their holdings by selling their interests back to the fund. This option is gaining strength and visibility in the investment community. For example, Ospraie Management recently launched a $750 million hybrid fund that will make private equity investments with an open-end structure, and many others are following suit — with investors responding very positively.

A Place at the Table
Clearly, individual investors are just as interested in earning higher returns as are institutional and high net worth investors. In fact, as the pool of potential investors deepens, it will behoove fund management firms to seek new means to involve individuals at a variety of levels.

The trend toward democratization in investing is a welcome one for individual investors. The recent moves to create public structures that allow investment into private companies have already proven their success — and will be the impetus for yet more innovations in the fund markets. Indeed, it may not be long before we will need to coin a new phrase to describe the phenomenon that broadens investment opportunities — perhaps most appropriately it shall be known as “public-private equity.” While seemingly contradictory on the surface, it is the entr?e that will feed hungry investors, creating the potential to allow them to take their place at the table of high returns.