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At Ares Management’s analyst day last month, the alternative asset manager quietly bumped up its three-year fundraising targets by 25%.

CEO Michael Arougheti told CNBC the change was due to better-than-expected momentum among individual, wealthy investors.

A recent survey by State Street found that the “retail revolution” will drive more than half of the private market flows in the next few years, a seismic shift from traditional sources of fundraising, which historically comprised institutional investors. Ares has been one of the key beneficiaries of the trend, having offered different types of vehicles for retail for more than two decades.

“What’s changed now is the quality of the product, the scale of the product – the investment that we’ve made in servicing the products,” Arougheti said in an interview.

Ares has 185 people in 10 offices globally who are working on product development and client education, he said. The firm already has more than $50 billion in assets under management from semiliquid vehicles targeted at retail. Arougheti said Ares’ market share of the retail segment is approaching 10%. 

As the momentum for retail allocation in alternatives builds, some have cautioned that managers will funnel weaker deals toward individual investors, while reserving better assets for institutional investors. A recent paper by Harvard University found that there’s a performance disadvantage among funds sold more broadly, which the author said, “raises the possibility that products with poor performance are being channeled to investors who are less wealthy and less financially sophisticated.” 

“This narrative of weaker products being reserved for retail is just not true,” Arougheti said, adding that only the largest managers with the “highest quality” deals have enough scale to build their wealth platforms.

“We actually allocate our investments based on available capital, and so a lot of the investments that are finding their way into our institutional client portfolios are also finding their way into our wealth product,” Arougheti said. “And so they’re growing together.”

Ares had about $572 billion in assets under management as of the end of June, with two-thirds in credit. The firm has investments in more than 3,000 middle-market companies.

As for the value proposition – why individual investors would be so interested in alternatives right now, especially when public equities have returned so much in recent years – Arougheti said he thinks it’s a response to the increasing concentration in the liquid securities. 

“It’s actually pretty difficult to navigate a diversified portfolio in the public markets,” Arougheti said. “They’re looking for diversified and noncorrelated equity exposure, so private equity, real estate, etc.” 

The retail revolution that Ares is so bullish on doesn’t even account for the potential opening up of 401(k) retirement accounts for greater allocation toward alternatives, which could bolster the firm’s AUM targets even more. But Arougheti was somewhat skeptical about how quickly this market would move the needle for the industry. 

“I actually don’t think we’ll see change in behavior until there’s a change in regulation,” he said. 

“And the challenge with that – that sector – which is almost to the disadvantage of the end client, is it’s very, very fee-sensitive, and the narrow definition of fiduciary duty is cost, not what my unit of return delivered for that cost,” Arougheti said. “So, almost by definition, structurally, the market is not geared to alts, where fees are higher, but you pay for a much higher net return. So until you give the plan sponsors that comfort that they’re free of litigation risk for having not pursued their fiduciary duty, I think it’s going to be hard.” 

Still, as the industry evolves toward the masses, Arougheti encouraged a rethinking of the term “alternative.” 

“There’s nothing ‘alternative’ about what we do anymore, right?” he said. “The biggest misconception is that somehow or another, the private markets are creating investment exposures that otherwise wouldn’t exist, that we’re creating demand for capital that otherwise wouldn’t exist, as opposed to just understanding this is the natural evolution and innovation in the capital markets that we’ve seen for generations.”