Private equity for the masses?

Philadelphia real estate investors Michael C. Forman and David J. Adelman are betting small investors have a growing appetite for private equity. Their partnership, FS2 Capital Partners LLC, filed last week with the Securities and Exchange Commission to raise $1.5 billion for a new fund, Franklin Square Investment Corp., that will pay regular dividends but won’t be listed on any stock market.

“When you cant’t raise money in private equity circles, who do you go to? The public. Though a billion and a half does sound like a lot in today’s investment environment,” says one observer, Philadelphia-based retail invesment consultant Burton J. Greenwald.

“Private equity still has that aura about it -- this is how the rich people invest,” Greenwald added. But he warned that non-traded funds tend to sell at a discount after the initial public offering. And, he asked, “Are small investors really valuable to managers as long-term clients?”

There are signs that small investors have an appetite for more than stocks and bonds. “The market for asset-based alternative investments has expanded dramatically, from around $900 million at the start of 2000, to $11.6 billion last year,” said Keith Allaire, an investment banker at Stanger & Corp. in Shrewsbury, NJ, who worked on the Franklin Square deal.

Most of that growth has been in non-traded Real Estate Investment Trusts, according to Allaire. Franklin Square is an effort to add private equity to broker-dealers’ product pipeline. “The market is basically oriented toward retail investors,” typically people who make at least $70,000 a year and have $70,000 already invested,” said Allaire.

Franklin Square will be managed by GSO Capital Partners of New York, which in January agreed to be acquired by hedge fund and private investment manager Blackstone Group.

“With all the volatility in the stock market, the retail investor needs more places to put his money,” said Adelman.

“What Ira Lubert and Dean Adler are doing in the private fund business for larger investors, we’re going to do in the retail channel,” he added, citing Franklin Square’s Cira Center neighbors, who run the $7 billion-asset Independence Capital investment group.