Private Fund Insights Blog

Note to readers: This is a continuation of our previous discussions around the opening up of the alternative asset market to 401(k) assets. In this post, we expand the discussion to address the broader trend of retail investors coming into the alternative asset markets and focus on potential implications for institutional investors.

Traditionally, alternative asset managers have structured their investment platforms around the needs of institutional investors whose capital, investment horizons and tolerance for illiquidity suited the traditional fund model. More recently, a confluence of developments has pushed alternative asset managers toward opening their investment platforms to retail investors, often referred to as the “retailization” or “democratization” of the alternative asset market. Such retailization is shaking up the traditional arrangement between alternative asset managers and institutional investors in ways that institutional investors must monitor and manage going forward.

A trend with momentum

Washington is a driving force behind the trend. In August 2025, President Trump signed Executive Order 14330, directing the DOL to clarify how retirement plans may offer alternative assets. As we previously covered, the DOL responded on March 30, 2026, with a proposed safe harbor for fiduciaries who select plan investments, including funds that hold alternative assets.[1] The rule is not final, but it gives fiduciaries an early road map for adding private markets exposure to 401(k) plans.

The SEC is moving in the same direction. On Sept. 30, 2026, it proposed rules to advance what Chairman Paul Atkins calls “responsible retailization.” The proposals would let more funds (including BDCs) and investors pay performance fees similar to those traditionally charged by alternative asset managers, including fees on unrealized gains (subject to a 20% cap on net gains and certain governance requirements).[2] The proposals would also redefine “qualified client” to include any accredited investor, which would widen the pool of investors who can be charged performance fees, including in Section 3(c)(1) private funds.[3] They would also give interval funds (which, together with tender offer funds, are among the most common structures for offering alternatives to individuals) more flexibility on repurchases and liquidity and would let certain registered closed-end funds and BDCs offer multiple share classes without individual exemption relief.[4] Finally, the SEC issued notices seeking comment on whether individuals should be able to qualify as accredited investors by passing a new FINRA exam or holding credentials such as a CPA license, a CFA charter or a CFP certification.[5]

Market forces are also pushing toward retailization. In the past few years, managers have faced a difficult fundraising environment and fewer portfolio company exits.[6] Individual investors provide a new and potentially large source of capital. At the same time, retail investors want more places to invest as the number of public companies shrinks.[7] Technology enables the trend by making it easier and cheaper to admit many small investors.

Managers are moving quickly. Partnerships have been announced between Capital Group and KKR,[8] among Wellington, Vanguard and Blackstone,[9] and between T. Rowe Price and Goldman Sachs.[10] These arrangements combine the distribution and retail investor know-how of traditional registered investment companies with the deal flow of alternative asset managers. Other managers are going straight into retirement plans and the advice channel. And the alternative asset managers that have historically offered access to retail investors continue to see investment in those vehicles grow.[11]

One company, two owners

For institutional investors, retail capital is more than a new way for managers to raise money. The 2025 white paper on retail capital from the Institutional Limited Partners Association (ILPA)[12] surveys the resulting conflicts in detail, and the hypothetical below draws on several of the conflicts ILPA identifies. We follow a single hypothetical investment held by both an institutional fund and an affiliated retail vehicle to show how those conflicts play out in practice and where today’s fund documents leave institutional investors exposed.

1. The deal. A manager’s 2026 buyout fund agrees to buy a $500 million stake in a software company and has $100 million of co-investment to offer. In the past, that co-investment would likely have gone, at least in part, to the fund’s largest investors on a reduced-fee or no-fee basis, whether under a side letter right or to build the relationship between manager and investor. Now the manager is allocating the opportunity between the buyout fund’s investors and an affiliated evergreen vehicle. The evergreen vehicle is fully funded and needs to put its cash to work, while the buyout fund calls capital only when a deal is ready. The evergreen vehicle also pays the manager a flat management fee for as long as it holds the stake and, in some vehicles, a performance fee, so every dollar it invests earns the manager more than the same dollar from a no-fee co-investor, a point ILPA also makes. If the SEC’s proposals are adopted, even more evergreen vehicles could pay a performance fee of up to 20% of net gains, including unrealized gains, and could charge those fees to a broader group of investors. The co-investment that once went to a pension plan at little or no fee now carries a clear price tag for the manager. The manager’s fiduciary duties and side letter co-investment rights, if any, still apply, but it is difficult to prove a breach of fiduciary duty after the fact, and managers may resist providing co-investment rights under the side letter to all but their largest investors. Unfortunately, the fund’s commitment cap and allocation policy are unlikely to provide institutional investors any protection here.
2. The marks. Two years later, the company is marked up 30%. For the buyout fund, the mark matters for reporting, fundraising, and any NAV financing or secondary pricing, but institutional investors are ultimately paid from actual exit proceeds. For the evergreen vehicle, the mark sets the price new investors pay and the price redeeming investors receive, and it could support a performance fee paid now. The same manager strikes both marks, and, as ILPA notes, the evergreen vehicle’s board, whose duty runs to the retail vehicle and not to the fund, oversees the valuation process.
3. The team. The evergreen vehicle needs a steady stream of new deals to stay invested, so the deal team that sourced the software company may spend more of its time on retail deployment. If the key person provision only requires the named individuals to devote substantially all of their business time to the manager and its funds as a group, time spent on the retail vehicle may not trigger the buyout fund’s key person provision. Meanwhile, running a retail vehicle adds its own legal, regulatory and compliance burden — a risk ILPA also highlights — and the fund’s expense definition may not clearly say who pays for it.
4. The exit. In year four, the evergreen vehicle receives redemption requests above its quarterly repurchase limit. Even if the vehicle limits repurchases, the manager faces real liquidity pressure. The software company is performing, and the buyout fund’s investors would be better served by holding it for two more years. As ILPA flags, there is a risk that the manager may be tempted to sell the software company early, or move it into a continuation vehicle, so the retail vehicle can meet redemptions, even if doing so is not in the best interest of the buyout fund. The limited partnership agreement leaves the timing of exits to the GP’s sole discretion. And, as ILPA also observes, even if the fund’s investors later remove the GP, the manager may keep managing the evergreen vehicle’s stake in the same company because that role answers to a separate board.

None of these steps requires bad faith by the manager. Each follows from fund documents drafted for a world with only institutional capital. The drafting points below aim to address these new risks.

What to consider in the next fundraise

The risks described above are not the same for every manager. They scale with the size and maturity of a manager’s retail ambitions, and some managers may never pursue retail capital or may raise only a modest amount of it. Institutional investors diligencing and negotiating new fundraises should therefore confirm each manager’s current retail platform, if any, and its plans for future retail products. These conversations are best had now, while the next fund’s governing documents can still be shaped to account for retail capital, rather than after the manager’s retail business is already established. ILPA’s white paper includes a detailed list of diligence questions institutional investors may want to raise with managers, and the drafting points below are meant to be used alongside it.

• Plans for retail capital. Before negotiating any of the terms below, confirm whether the manager has, or plans to build, a retail business. If so, find out the size of the manager’s retail business and where it is headed. The answer should set priorities for each of the provisions below.
• Fund cap. Confirm with the manager whether the fund’s cap accounts for retail capital. If not, investors could ask for a separate limit on how much affiliated retail capital can invest alongside the fund. If a manager will not agree to such a limitation, investors could ask for regular reporting on how much retail capital is sitting beside the fund. ILPA’s questions on caps and disclosure of retail capital are a useful starting point for these requests.
• Deal flow priority. Allocation language often gives the manager wide discretion to allocate opportunities “fairly and equitably over time,” and that language frequently sits next to a general reference to other vehicles the manager may sponsor. That combination does little to protect institutional fund deal flow once a retail vehicle exists. Investors should look for allocation provisions that specifically name retail vehicles or evergreen funds that may invest alongside the fund, and press reporting suggests some large managers are already moving to that approach with stated allocation caps.[13] Ideally, those provisions would not give the retail vehicle priority over the fund and would set a percentage limit on the retail vehicle’s share of each deal. Also be on the lookout for any language that allocates governance rights to an affiliated vehicle on any basis other than pro rata based on economic interest. The offering memorandum deserves the same review, as managers may craft disclosures to pave the way for a future retail vehicle. Look specifically for language describing a companion or evergreen fund with allocation priority over the fund.
• Co-investment allocation. Managers typically keep broad discretion over co-investments, leaving themselves the flexibility to offer excess capacity to whomever they choose. Given the fee incentives described above, investors may want to ask that excess capacity first be offered to institutional investors before any affiliated retail vehicle receives more than its pro rata share, and investors will need to make sure that any preferential co-investment rights granted in a side letter have priority over the manager’s retail vehicles.
• Successor funds. Successor fund definitions are typically drafted around traditional closed-end funds; therefore, a fund’s successor-fund restriction might not keep the manager from launching a retail vehicle with the same strategy. If the manager currently has or plans to form a retail vehicle, institutional investors may ask that the successor-fund restriction cover such retail vehicles.
• Key person. Key person provisions typically require the named individuals to devote “substantially all” of their business time to the manager and its funds as a group. That standard may be met even if their attention moves toward retail products. A stronger provision requires a meaningful level of dedication to this specific fund and its predecessor and successor funds, and it does not carve out time spent on evergreen or other retail vehicles. Investors should also read any list of permitted outside activities, where retail carve-outs are easy to miss.
• Expense provisions. Running a retail product brings costs an institutional fund should not bear. As recommended by ILPA, fund expense definitions should expressly exclude costs that arise from the manager’s retail vehicles, such as retail-specific systems, regulatory filings, and any fines or claims against a retail vehicle. Investors may also consider asking that any shared costs be allocated in proportion to the benefit each vehicle receives rather than leaving these costs to a general allocation standard. Broken-deal and warehousing costs need their own provision. ILPA notes that a fund may bear these costs in full even if a retail vehicle later joins the deal or invests. The provision should require the retail vehicle to bear its share in those cases, including by reimbursing the fund if it buys in after the fund.
• Manager discretion. Fund documents typically give the GP broad authority to manage the fund, and many key decisions, including when and how to exit an investment, are left to its sole discretion. Investors should consider how that broad grant of authority could raise the risk of exits that serve a retail vehicle better than the fund, whether through an early sale or a continuation vehicle. Managers will point to their fiduciary duty to the fund as the safeguard, but an exit decision made in the GP’s sole discretion will be extremely difficult for investors to second-guess after the fact. The more practical protection is a check before the decision is made, rather than a claim afterward. For example, investors could ask that the Advisory Committee review or consent to any sale or continuation vehicle involving a company the fund holds alongside a retail vehicle.
• Information rights. Where the fund and a retail vehicle hold the same company, investors can ask that valuation materials prepared for the retail vehicle’s board be delivered to the Advisory Committee at the same time, building on ILPA’s suggestion that managers share with the Advisory Committee the information given to the retail vehicle’s board. Investors may also want to ask for expense reporting detailed enough to validate a proper split between the fund and any retail vehicle. Similarly, investors may want to ask for reporting on investment opportunities that were appropriate for the fund but that were allocated, in whole or in part, to a retail vehicle.
• GP removal. Removal provisions assume that removing the GP ends the manager’s control over the fund’s investments. As noted above, that is less true when the fund holds companies alongside a retail vehicle because, with respect to the retail vehicle, the manager answers to the retail vehicle’s board and shareholders. A removed manager may therefore keep managing the retail vehicle’s stakes in the same companies. Investors should consider asking for terms that take effect on removal. For example, the removed manager could be required to cooperate with a successor to the institutional fund’s GP.
• Consent requests. Be on the lookout for consent requests to change investment allocation or other conflict-of-interest provisions in ways that open up a pathway for retail vehicles. An investor asked to give up deal flow can reasonably request something in return, such as more co-investment rights, enhanced reporting or a cap that steps down if the retail vehicle grows past a set size.

Not all of this is bad news for institutional investors. According to press reports, some large managers argue that rather than cannibalizing institutional investor allocations, retail capital allows managers to pursue larger deals.[14] Retail and 401(k) demands could also raise the floor on transparency, valuation documentation and fee reporting for every investor. And the liquidity and fully funded structure of evergreen vehicles may suit some institutional investors’ own portfolios. Nevertheless, the direction is clear. Retail money is coming into private markets, and institutional investors should act now to ensure they have a clear picture of how retail money will shape the GP-institutional investor relationship going forward.

If you would like to discuss how these issues may affect your next fundraise or your existing fund documents, please contact a member of the Private Funds & Investments practice group.

[1] https://www.privatefundinsights.com/401-k-plans-as-lps-part-ii-reacting-to-the-dols-proposal-for-defined-contribution-plan-investment-into-private-funds.

[2] Investment Adviser Performance-Based Compensation Modernization, Release Nos. 33-11443; 34-106533; IA-7022; IC-36350 (Sept. 30, 2026), https://www.sec.gov/files/rules/proposed/2026/33-11443.pdf.

[3] Id.

[4] Interval Fund Modernization; Expansion of Multiple Share Class to Registered Closed-End Management Investment Companies and Business Development Companies, Release Nos. 33-11444; 34-106534; IC-36351 (Sept. 30, 2026), https://www.sec.gov/files/rules/proposed/2026/33-11444.pdf.

[5] https://www.sec.gov/newsroom/press-releases/2026-96-sec-proposes-amendments-expand-responsible-retailization-private-markets.

[6] https://www.privatefundinsights.com/continuation-vehicles-in-the-age-of-zombie-funds-legal-strategies-for-sponsors-and-lp-protections.

[7] World Bank, World Development Indicators, “Listed domestic companies, total – United States” (CM.MKT.LDOM.NO), https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?locations=US.

[8] Capital Group, Capital Group and KKR Launch Their First Two Public-Private Investment Solutions and Announce Plans to Expand Their Exclusive Strategic Partnership (April 29, 2025), https://www.capitalgroup.com/about-us/news-room/capital-group-kkr-launch-public-private-solutions.html.

[9] Wellington, Vanguard, and Blackstone Announce the Launch of Two Investment Solutions, Simplifying Access to Public and Private Markets (July 22, 2026), https://www.blackstone.com/news/press/wellington-vanguard-and-blackstone-announce-the-launch-of-two-investment-solutions-simplifying-access-to-public-and-private-markets/.

[10] Goldman Sachs, Goldman Sachs and T. Rowe Price Announce Strategic Collaboration to Deliver Innovative Public-Private Investment Solutions (Sept. 4, 2025), https://www.goldmansachs.com/pressroom/press-releases/2025/announcement-04-september-2025.

[11] https://ionanalytics.com/insights/mergermarket/private-equitys-retail-push-threatens-to-upend-traditional-gp-lp-dynamics/.

[12] https://ilpa.org/wp-content/uploads/2025/11/ILPA-Retail-Capital-Analysis-Primer-and-Questions-to-Ask-GPs.pdf.

[13] https://ionanalytics.com/insights/mergermarket/private-equitys-retail-push-threatens-to-upend-traditional-gp-lp-dynamics/.

[14] https://ionanalytics.com/insights/mergermarket/private-equitys-retail-push-threatens-to-upend-traditional-gp-lp-dynamics/.