Wealthy individuals viewed as new market for asset classes such as credit, private equity and real estate
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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.
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Institutions typically invest between 30 and 50 per cent of their assets in alternatives, according to a study by McKinsey & Co. The average retail investor had just two per cent in alternatives, the same study said.
McKinsey projected that the retail share has potential to more than double to five per cent in the next three years, an increase the consultancy estimates could add between US$500 billion and US$1.3 trillion 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 that combines asset management with financial planning and advice and is expected to swell to almost US$230 trillion in assets by 2030 from US$137 trillion in 2021, 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 Inc., 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 Gmbh.
Earlier this month, the US$1-trillion Canadian alternatives manager Sun Life Financial Inc. announced the acquisition of Advisors Asset Management Inc., a Colorado-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 & Co. Inc., a private-equity pioneer that has expanded into other alternatives, has US$6 billion from wealth management clients in its so-called democratized products. The New York-based group said it is earmarking 30 to 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. Any wealth adviser not using alternatives in the next few years will be at risk of not having a practice.”
Fintech platforms such as Moonfare and Institutional Capital Network Inc. 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 US$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 Inc. 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 Investment Partners LLC, which specializes 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 US$2.6 billion in shares of Breit, more than triple the US$700 million in redemptions from the previous quarter.
“We haven’t really seen the other side of it yet,” Patterson said.
© 2022 The Financial Times Ltd.
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