Retail and high-net-worth (HNW) investors looking to place their money in alternatives might be “one of the biggest re-allocations in finance” in the coming years, according to panelists at the “Unlocking New Pools of Liquidity” discussion, which took place at Informa Plc’s SuperReturn North America event in New York City on Nov. 6. But while the panelists agreed that there are plenty of untapped opportunities for private market players, they cautioned that trying to connect with those money sources also comes with several challenges.
A recent industry paper estimated that $10 trillion managed by wealth managers will move into alternative investments over the next decade, according to Jessica Nicosia, senior vice president with alternative client solutions provider Wilshire, who moderated the discussion. While she noted that specific figure could be debated, “There is a lot of wealth in the country and a lot of it today is not invested in alternatives. There’s clearly a very large and fruitful opportunity that is here,” she said.
Today, the typical retail investor portfolio has less than 2% allocated to alternatives, according to Cyril Schopfer, managing director and head of CACEIS U.S., an asset servicing bank. By bringing that share up to 5% or 10%, which would still be below what many large institutional investors have allocated to alternatives, “you could see what the opportunity is,” Schopfer said.
Nicole Runyan, partner with the law firm Kirkland & Ellis LLP, noted that she is having conversations with the firm’s GP clients on a daily basis about the untapped market of retail and HNW investors. This runs across GPs focused on various strategies, including private credit, private equity, real estate and infrastructure. Because institutional investors have been playing in the alternatives market for some time, the GPs are increasingly seeing retail investors as a new growth area, she noted. Meanwhile, the channels serving those investors, including single and multi-family offices and RIAs, have become increasingly sophisticated and knowledgeable about alternative investment options. In fact, the retail investors themselves are coming to their RIAs and family offices and asking for investment options in alternatives, said Nicosia.
Similarly, Aditi Javeri Gokhale, who serves as chief strategy officer, president of retail investments and head of institutional investments with Northwestern Mutual, reported that over the past three years, her firm saw the largest growth coming from the wealth channel, with the fastest growth coming from independent broker/dealers specifically. It would be a mistake to think of retail investors as “amateurs,” she noted. Today, they have access to a lot of information and market insights, and they understand that over the last 20 years, private equity funds have tended to outperform traditional stocks and bonds. “So, they are absolutely looking at opportunities to get in.”
However, according to both Nicole Runyan and Tim Andrews, CEO of investor hub IDR, what hasn’t emerged yet in a significant way is an efficient way to manage that growing demand. While the sources of funding for alternatives have evolved, the methods for bringing new investors into the funds have stayed roughly the same as when he was in college, reading “Barbarians at the Gate,” Andrews said. The private markets are in need of more centralization and standardization to help bring retail investors into the fold, he noted.
“I think increasingly, as the wave of private wealth comes through into the market, the challenges in fundraising and execution [that are seen today] will drive material change in future years in the structure and the way in which private markets operate,” he said.
One of the opportunities Andrews sees in today’s environment is finding ways for private market players to access individual investors directly, without going through large retail banks.
But market participants also need to think carefully about what type of retail investors they want to go after and how they are going to sell their products to those investors, cautioned Runyan. A GP looking for what is essentially a “high-net-worth feeder” is looking for something fundamentally different than someone who wants to directly target accredited investors, RIAs and family offices and the time and cost necessary to build that distribution channel from scratch could be significant, she noted. For some of Wilshire’s clients, it has meant building their own internal broker/dealer operations. Others have needed to form joint ventures or strategic relationships with capital providers. In addition, before investing their money with a given venture, retail investors will want to see that your firm has a track record, a critical AUM and a diverse portfolio that has delivered predictable returns.
“And that doesn’t come or get built overnight,” Runyan said. When it comes to distribution, “we say a lot of the time, ‘retail is sold, not bought.’ You may have the best strategy in the world, but if you can’t sell it, you are going to find yourself in a tough place.”