Nicholas Schorsch, head of American Realty Capital and RCAP Holdings, continues his acquisition tear, with the purchase today of liquid alternatives manager Hatteras Funds. The move adds $2 billion in assets across multiple alternatives funds, as well as its distribution team. Schorsch, one of REP. magazine's Ten to Watch for 2014 , talks with WealthManagement.com about why he didn't just build out the funds himself and what acquisitions might be next.
WealthManagement.com: Why the acquisition of Hatteras? How does this fit into your overall goal and company expansion?
Nicholas Schorsch: Hatteras has its own distribution channel. For us, it broadens our distribution for the products that we distribute, but it also broadens our distribution because we’ll be able to work in the wires, which we’re already in with our products. Our open-end fund and our family of funds International Fund Advisory Group, which is one of our fund companies, will also be able to share distribution with Hatteras. So there’s a synergy and efficiency there.
It also adds $40 to $60 million of revenue to the top line. This is recurring income. It’s a different source and type of income, which really balances out our earnings flow at RCAP.
WM.com: Why didn’t you just build out these liquid alternatives funds yourself as opposed to acquiring them?
NS: There are all the things that you need to build these funds; you need to get your ratings and your followings and your track record. The deal structure was an earn-out so we all grow together. We also are getting a full distribution team; it’s not just the funds. Bob Worthington is the president, and he runs their distribution. By adding our scale and their fund track record and quality, we are going to be able to really help them grow this platform exponentially.
WM.com: What does this move mean for advisors, many of whom have run scared of alternatives of the illiquid kind?
NS: I think the average investor—the mass affluent—wants durable income products. Those durable income products would include real estate, alternatives, commodities, long/short, bond funds like a BDC, open-end funds. So I think it’s about giving the investor and the advisor choices, and why shouldn’t our distribution team be able to offer all those choices.
The fact is that FINRA and the IBD channel and everybody else wants to see no more than a 10-20 percent allocation to illiquid alts. So what do you do with the other 80 percent of your money? Do you put it all in stocks? Do you put it all in bonds? Of course not. It’s got to look more like the endowment model—a fully diversified portfolio. The thing that’s really dead is the conventional wirehouse packaged product. You buy a fund, and you don’t really know what’s in it. A lot of retail investors have been buying these funds that are all made up of liquid assets. And they think they’re buying something unique, and what they’re buying is basically a stock and bond fund. And that’s not the only thing that should be in a portfolio.
WM.com: How much do you think advisors should allocate to alternatives?
NS: In alternatives that are illiquid, we think it should be between 10 and 20 percent, which is the same thing that FINRA thinks. In the liquid bucket, it should be another 20-30 percent of the portfolio that offer different risks and rewards.
WM.com: What’s next for you? How do you plan to expand your product mix?
NS: We do want to have other strategies, maybe some global strategies. There are a number of other funds that we intend to buy or create, such as long/short strategies, more venture structures, more private equity structures.