A saturated market for institutional clients is prompting asset managers to pursue another business: selling so-called alternative investments to wealthy individual investors.
Options tend to stray outside the mainstream portfolio of stocks and bonds in asset classes such as credit, private equity and real estate. Far from the tough and often accreditation requirements for trading, they have historically been the domain of large investors such as pension funds and endowments.
Institutions usually invest between 30-50 per cent of their assets as an option, according to a study by McKinsey, The same study noted that the average retail investor had only 2% in options.
McKinsey estimated the retail share could more than double to 5 percent over the next three years – the increase in consulting estimates could increase between $500bn and $1.3tn in new capital for the option.
Asset managers are turning to affluent individual investors for new business as institutions hit self-imposed limits on the allocation of options, also known in the industry as “alts.” According to the consultancy, Bain, they are reaching them through wealth management, a business that combines asset management with financial planning and mentoring and is expected to grow from $137tn in assets in 2021 to around $230tn by 2030 .
“The bottom line is that if you think about the size of the market, high net worth is as big as institutional money. These are mass markets that have not been extensively used,” said Head of Private Wealth Solutions at Blackstone Joan Solotar, Alternative Asset Management Group, said.
Until recently, there were a handful of institutional products 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 grow by leaps and bounds.
“At least 15 to 20 new products with different strategies from all the different big managers will hit the market in the next nine months. This is a huge change,” said Stephen Pauls, founder of retail-focused private equity investment platform Moonfair.
Earlier this month, $1tn Canadian alternative 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 part of a nearly decade-long effort by Sun Life to bring its alternative products to retail customers.
“It’s a race to get a spot in that market,” said Sun Life president Steve Peacher. Mergers in the space have been frenzied, he said: “If you’re not getting involved credibly and actively [alternatives for retail] In the next 18-24 months, it will be too late.”
KKR, a private equity pioneer that has expanded into other options, has $6bn in its so-called democratic products from wealth management clients. The New York-based group said it is earmarking 30-50 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 to demand from wealth managers, who are desperate to protect clients from large bear market swings and rising interest rates.
“There is a tremendous shift in capital from the traditional wealth management industry to alternative investments,” said Matt Brown, CAIS founder and CEO, Marketplace for Alternative Investments. He said that “traditional” asset allocation for individuals, such as 60 percent in stocks and 40 percent in fixed income, now feels outdated in a world where most institutions have half of their capital in the form of options. Is.
“Any money advisor who does not exercise options in the next few years will be at risk of not exercising,” Brown said.
Fintech platforms such as Moonfair and iCapital have moved in recent years to open up private markets. Like most retail-focused alternative investment products, Moonfair is available only to accredited investors—usually people with enough sophistication and money to stomach large losses, or those 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 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 a monthly or quarterly option for redemption.
For asset managers, wealthy retail investors are an important source of new money for firms as institutional dollars dry up.
“If you look at the last 12 years, retail has been an incredibly sticky, one-way flow,” said Michael Patterson, a partner at HPS Partners, the alternative manager that specializes in credit.
But if they fail to perform in fluctuating markets, their desire for alternative investments may fade. The asset manager said that an unexpected amount of money was withdrawn from Blackstone retail products such as Breit in Q2 2022, indicating that retail investors are not protected from “volatile markets”. Investors sold nearly $2.6bn in Breit shares, more than triple the $700mn in redemptions from the previous quarter.
“We haven’t really seen the other side of it yet,” Patterson said.