A market saturated with institutional clients is pushing asset managers to look for another business: selling so-called alternative investments to wealthy individual investors.
Alternatives move away from core stock and bond portfolios toward asset classes such as credit, private equity, and real estate. Harder to market and often protected by accreditation requirements, they have historically been the domain of large investors such as pension funds and endowments.
Institutions typically invest 30 to 50 percent of their assets in alternatives, according to a McKinsey study. The average retail investor had only 2 percent in alternatives, according to the same study.
McKinsey projected that the retail share has the potential to more than double to 5 percent over the next three years, an increase the consultancy estimates could add between $500 billion and $1.3 trillion in new capital to alternatives.
Asset managers are turning to wealthy individual investors for new business as institutions hit self-imposed limits on allocations to alternatives, also known as “alts” in the industry. They are reaching them through wealth management, a business that combines asset management with financial planning and advice and is expected to grow from $137 trillion in assets in 2021 to nearly $230 trillion in 2030, according to Bain. , the consultant.
“The bottom line is that if you think about the size of the market, high net worth is as big as institutional wealth. These are massive markets that are largely untapped,” said Joan Solotar, head of private wealth solutions at Blackstone, the alternative asset management group.
Until recently, only a handful of institutional products were available to retail investors, such as Blackstone’s flagship Real Estate Investment Trust, an unlisted fund known as Breit, and its private credit fund, BCred.
But offers designed for retail investors will multiply.
“At least 15-20 new products with different strategies, from all the big managers, will hit the market in the next nine months. It’s a big change,” said Steffen Pauls, founder of retail-focused private equity investment platform Moonfare.
Earlier this month, $1 trillion Canadian alternatives manager Sun Life Financial announced the acquisition of Advisors Asset Management, a US-based retail distribution company that works with investment managers. The acquisition was the final piece of a nearly decade-long effort by Sun Life to bring its alternative products to retail customers.
“It’s a race to get a foothold in that market,” said Sun Life chairman Steve Peacher. Mergers in the space have been frantic, he added: “If you’re not credibly and actively engaging [alternatives for retail] in the next 18-24 months, it will be too late.”
KKR, a private equity pioneer that has expanded into other alternatives, has $6 billion worth of wealth management clients in its so-called democratized products. The New York-based group said it will earmark 30 percent to 50 percent of the newly raised capital to come from wealthy individuals.
Asset managers said their efforts to bring new alternative products to market are a response in part to demand from wealth managers who are desperate to protect clients from big bear market swings and rising interest rates. interest.
“There is a tremendous shift of capital taking place from the traditional wealth management industry to alternative investments,” said Matt Brown, founder and CEO of CAIS, a marketplace for alternative investments. “Traditional” asset allocations for individuals, such as 60 percent stocks and 40 percent fixed income, now feel outdated in a world where most institutions hold up to half of their capital in alternatives, he said.
“Any wealth advisor who doesn’t use alternatives in the next few years is going to be at risk of not having a practice,” Brown said.
Fintech platforms like Moonfare and iCapital have moved in recent years to open up private marketplaces. Like most retail-focused alternative investment products, Moonfare is only available to accredited investors, usually people with enough sophistication and money to withstand big losses, or who work in finance. The minimum investment on these platforms is still around $75,000.
Managers said the products are not yet ready to be brought to less wealthy investors who need to be able to buy and sell investments more easily. Products that companies like Apollo Global Management and Blackstone currently offer to wealthy investors only offer monthly or quarterly repayment options.
For asset managers, wealthy retail investors are a crucial source of new money for companies as institutional dollars dry up.
“If you look at the last 12 years, retail has been an incredibly complicated one-way flow,” said Michael Patterson, a partner at alternatives manager HPS Partners, who specializes in credit.
But their desire for alternative investments could fade if they don’t perform in shaky markets. In the hectic second quarter of 2022, money was withdrawn from Blackstone’s retail products like Breit in unexpected volumes, showing that retail investors are not immune to “volatile markets”, the asset manager said. Investors sold nearly $2.6 billion of Breit shares, more than triple the $700 million in bailouts the previous quarter.
“We haven’t really seen the other side yet,” Patterson said.