There’s a growing consensus that retail investor interest in alternative investments is rising, but how that translates into real investment activity remains a question.
Backers of alternative investments say they offer robust medium and long-term returns and provide portfolio diversification at the cost of liquidity. But the breadth and complexity of both alternative asset classes and fund structures means dipping a toe into the space is difficult for advisors with no knowledge or experience.
More than 1,000 wealth management professionals, asset managers and others gathered this week at the CAIS Alternative Investment Summit to assess the state of alts and how they might fit into client portfolios now and in the future. It is the second year CAIS has hosted the event and attendance tripled compared to the inaugural edition.
“We are at the early stages of a decade long adoption of alternatives in the wealth management business,” said John Taft, vice chairman for Baird, a financial services firm with more than $405 billion in client assets, during one of the conference’s sessions. “One of the key ingredients to make it happen so clients get the outcomes their advisors are telling them they should get is education. Most financial advisors do not understand alternative investments today. ... We are at the ‘lead with learning’ stage of adoption.”
There has been a notable uptick in products aimed at the wealth channel, including interval funds, tender offer funds, BDCs and other semi-liquid vehicles for private equity, private credit, real estate, commodities, structure notes and other asset classes.
Investment managers that historically have targeted institutions and HNW investors have begun to add these products to their menus for more mainstream clients. Managers including Blackstone, Carlyle, Franklin Templeton, Morgan Stanley and others were at the conference explaining these offerings.
“We’ve been in private wealth for a number of years, but it’s been a recent phenomenon to deliver all of our capabilities in perpetual evergreen strategies,” said Doug Krupa, managing director of the client and partner group with KKR. “We want to deliver same investor experience and content to individual investors. It’s very challenging to do.”
KKR’s wealth offerings include a tender offer interval fund, BDCs, non-traded REITs and unlisted operating companies executed across private equity, private real estate and other asset types.
These types of offerings often come with lower investment minimums than funds aimed at bigger players (sometimes $50,000 or less) and offer some level of quarterly liquidity while aiming to provide access to the same strategies and managers that previously did not serve the wealth space. They also offer 1099 reporting rather than K1s and lower or no capital calls after initial investments.
“No longer is independent wealth management the afterthought,” Brown said. “Wealth management is the No. 1 area of growth for every asset manager in this room. They are building teams. They are going to make your life really easy. They are developing products that make sense for you and your clients.”
They are all projecting growth even though historically advisors have not heavily used alts. A recent study from Cerulli, for example, said advisors continue to report low alternative investments and commodities allocations of 5.8%. Similarly, research from WealthManagement IQ found about 60% of advisors surveyed had some experience with alts. Those respondents estimated about 30% of their clients have some alts exposure.
“There’s a community of alternative asset managers—in real estate, private equity, private credit, infrastructure, etc.—all very focused on wealth management as an area of growth,” CAIS founder and CEO Matt Brown said in an interview. “They are committing to serve the advisor audience. And they are all creating products that are wealth centric and more wealth friendly. The ones doing that are getting market share and advisor loyalty.”
CAIS (like competitor iCapital) has worked to increase access and usage of alts, especially among independent advisors, through its marketplace that includes third party due diligence research from Mercer. Users can learn about investment categories and structures on these platforms, compare funds offered on the respective marketplaces and make and manage investments.
“One of the pain points for independents is tools,” said Molly Bennard, CEO of Connectus Wealth Advisors, an investment advisor with $7.5 billion in assets. She pointed to technology like CAIS as providing access, ease of execution, education and data on performance when deploying alternative investments. “Data is key to our tech strategy. It all comes back to good data and insight so you can make better decisions.”
In his comments to the conference, Brown pegged the alternative investment opportunity in the wealth space in the next decade as worth up to $10 trillion.
“Today there is $40 trillion under advisement,” Brown said. “In the next 10 years that number is going to grow to $70 trillion. Of that, 40% is managed by independent advisors and 60% by wirehouse advisors. In the next 10 years that will be 50/50. And there is a 5% allocation to alts today. Over the next decade it will be 20%. The main event for all of us is that 60/40 is giving rise to the modern portfolio, the 50/30/20 portfolio.”
Other attendees and presenters agreed with that bullishness. Sessions focused on explaining various asset classes and investment strategies and how managers are working to execute strategies amid a higher interest rate market in which deal flow has been muted and asset valuations are uncertain.
“Institutions 15 years ago didn’t have dedicated teams for private credit. Now they all have dedicated allocations and are sophisticated about it,” said Justin Plouffe, managing director and deputy chief investment officer for global credit for The Carlyle Group. “The real next wave is in the retail and insurance areas. ... With individuals it started with public BDCs, then private BDCs. It will open up to more credit. Institutional will remain core, but it’s not the growth area.”