A saturated market for institutional clients is pushing asset managers to pursue another business: selling so-called alternative investments to rich individual investors.
Alternatives stray outside mainstream portfolios of stocks and bonds into such asset classes as credit, private equity and real estate. Harder to trade and often walled off by accreditation requirements, they have historically been the domain of large investors such as pension funds and endowments.
Institutions typically invest between 30-50 per cent of their assets in alternatives, according to a study by McKinsey. The average retail investor had just 2 per cent in alternatives, the same study said.
McKinsey projected that the retail share has potential to more than double to 5 per cent in the next three years — an increase the consultancy estimates could add between $500bn and $1.3tn in new capital to alternatives.
Asset managers are turning to affluent 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 which combines asset management with financial planning and advice and is expected to swell from $137tn in assets in 2021 to almost $230tn by 2030, according to Bain, the consultancy.
“The bottom line is if you think about the size of the market, high net worth is as big as institutional wealth. These are massive markets that have been largely untapped,” said Joan Solotar, the head of private wealth solutions at Blackstone, the alternative asset management group.
Until recently, just a handful of institutional products have been 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 offerings designed for retail investors are set to multiply.
“At least 15 to 20 new products with different strategies, from all different large managers, will hit the market in the next nine months. It’s a huge change,” said Steffen Pauls, founder of retail-focused private equity investment platform Moonfare.
Earlier this month, the $1tn 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 takeover was the final piece of an almost decade-long effort by Sun Life to bring its alternative products to retail clients.
“It’s a race to get a position in that market,” Sun Life president Steve Peacher said. Mergers in the space have been frenetic, he added: “If you’re not credibly and actively getting into [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 $6bn from wealth management clients in its so-called democratised products. The New York-based group said it is earmarking 30-50 per cent of newly raised capital to come from wealthy individuals.
Asset managers said their efforts to bring new alternative products to market is a response in part to demand from wealth managers who are desperate to shield clients from large bear market swings and rising interest rates.
“There is a tremendous transfer of capital under way out of the traditional wealth management industry into alternative investments,” said Matt Brown, founder and chief executive of CAIS, a marketplace for alternatives investments. “Traditional” asset allocations for individuals, such as 60 per cent in stocks and 40 per cent in fixed income, now feel outdated in a world where most institutions have up to half their capital in alternatives, he said.
“Any wealth adviser not using alternatives in the next few years will be at risk of not having a practice,” Brown said.
Fintech platforms such as Moonfare and iCapital have moved in recent years to open up private markets. Like most retail-focused alternative investment products, Moonfare is only available to accredited investors — usually people with enough sophistication and money to stomach big losses, or who work in finance. Investment minimums on these platforms are still about $75,000.
Managers said the products are not yet ready to be taken to less wealthy investors who need to be able to buy and sell investments more easily. Products currently offered to affluent investors by firms such as Apollo Global Management and Blackstone only offer monthly or quarterly options for redemptions.
For asset managers, wealthy retail investors are a crucial source of new money for firms as institutional dollars dry up.
“If you look at the last 12 years, retail has been incredibly sticky, one-way flows,” said Michael Patterson, a partner at alternatives manager HPS Partners, which specialises in credit.
But their desire for alternative investments could fade if they fail to perform in wobbly markets. In the choppy second quarter of 2022, money was withdrawn from Blackstone retail products such as Breit in unexpected volumes, showing that retail investors are not immune to “volatile markets”, the asset manager said. Investors sold out of almost $2.6bn in shares of Breit, more than triple the $700mn in redemptions from the previous quarter.
“We haven’t really seen the other side of it yet,” Patterson said.