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The wealth management channel represents a multi trillion-dollar opportunity set, but accessing this client base requires support. As technology and product innovation expand access to alternative investments, advisers have the opportunity to produce improved investment outcomes for their clients.

This article originally appeared in Evercore’s State of the Market 2024 report.

The opportunity set

Alternative investments present a significant opportunity for the wealth management channel to improve investment outcomes for their clients. With the potential to enhance returns and reduce portfolio volatility, alternative investments can be a valuable addition to a portfolio. They can also be highly effective when markets are experiencing greater volatility, higher inflation and increased correlation with traditional assets. In 2022, the profound value of alternative investments was truly evidenced when the valuations of a traditional 60/40 portfolio dropped by over 15%, while alternatives generally remained flat.1 Naturally, clients of all levels of sophistication in the wealth management channel, including those who have yet to fully embrace alternatives, took notice and have started to investigate the unique investment opportunities in this asset class.

According to Bain & Company, individual investors held roughly half of global wealth ($140–150 trillion) in 2022, with a nearly equal amount being held and managed by institutional investors ($135–145 trillion).2 However, alternative investment strategies account for a very small percentage of individuals’ investable assets (estimated at less than 5%),3 representing a significant opportunity for growth.

While institutional investors have enjoyed the benefits of the private markets for some time, private wealth investors have lacked efficient education, access and technology to meaningfully participate in the alternative investments market. Fund managers also face substantial headwinds when it comes to accessing the fragmented wealth management channel, with Cerulli estimating there are approximately 290,000 financial advisers in the U.S. alone, managing $26.9 trillion in individual investor assets.4

We believe that increased exposure to alternative investments will give individual investors the same enhanced return potential and broader portfolio diversification that institutions have long enjoyed. However, the wealth management channel has been working with an incomplete set of tools to achieve these goals. As such, a shift in mindset is required: alternative investments should not be merely viewed as bolt-on exposure, but rather, as core holdings in a portfolio, with growth and income allocations across both public and private assets.

Education

In our 2023 iCapital Financial Advisor Survey, 95% of participating U.S. financial advisers expressed a desire for educational content on alternatives.5 Concurrently, alternatives managers have also cited the need for educational resources; Cerulli reported that 67% of alternatives managers noted adviser education as a top challenge for their firm’s distribution of alternative investments.6

To successfully cover the wealth management channel, it is crucial for fund managers to empower advisers with foundational and fund-specific educational resources. Unlike institutional investors, many individual investors also require due diligence support, which is key in the private markets where manager and strategy selection are critical. These resources are necessary for advisers to communicate the value proposition of alternative investments, and how a particular strategy will impact their overall investment portfolios.

Access and distribution

Historically, the wealth management channel has had limited access to alternative investment strategies due to the typical support model required. Fund managers can provide institutional investors with customised pitch books, arrange one-on-one meetings and spend hours handling follow-up calls. This approach, however, is not scalable in the fragmented wealth management channel.

Technology-enabled platforms, like iCapital, remove the traditional barriers between clients, their advisers and fund managers. With an open architecture platform, iCapital connects fund managers with a wide network of financial advisers, providing a centralised marketplace for private markets investment opportunities. iCapital also offers a dedicated alternative investments distribution team, giving advisers access to knowledgeable alternatives specialists, who can explain alternatives strategies and how they fit within a portfolio, and further support fund managers’ distribution efforts.

Execution

The complexities and administrative burden to offer alternative investment strategies to a large number of investors have also contributed to its limited adoption. However, iCapital is making it possible for advisers to seamlessly integrate private investments. Advisers are able to offer their clients high-quality funds at accessible minimum investment levels, allowing fund managers to access a larger segment of the wealth management channel, while effectively only dealing with a single entity, just as they would a typical institutional investor.

Technology has also transformed the historically manual and labor-intensive subscription process into an automated and seamless workflow. Furthermore, these technology- enabled platforms can provide streamlined subscription and redemption functionality and connectivity to custodians, fund administrators and other service providers, along with dashboards that provide performance metrics, capital call notifications, cashflow information and automated tax reporting, thereby creating an end-to-end, transparent and fully digital experience.

Cerulli reported that advisers increasingly rely on these platforms for educational and due diligence support, creating a centralised location for advisers to learn, invest and manage their alternative investments. Partnering with a technology-enabled platform also allows fund managers to seamlessly scale their operations and distribution within the private wealth channel.

Trends in the wealth management channel

Over the past several years, the market for evergreen alternative investment funds has evolved dramatically, providing individual investors greater access to institutional- quality managers through vehicles engineered to meet their needs. These open-ended funds typically provide investors with periodic share redemptions, allowing for greater liquidity than traditional alternative fund structures. Moreover, their open-ended nature, oftentimes designed to draw capital upfront, offers individual investors a more familiar vehicle than the capital call structure of private alternative funds.

As a growing number of individual investors seek enhanced return potential and broader portfolio diversification, we believe there will be shift within the traditional 60/40 portfolio to alternative equity and credit solutions. In our 2023 iCapital Financial Advisor Survey, almost all advisers surveyed (95%) said they plan to maintain or increase allocations to alternative investments in the coming year, with 44% actively planning to increase their allocations.7 The latter figure jumps to 58% among advisers with at least $500 million in assets under management.8

Private equity

Across the iCapital platform, we have seen increased interest in private equity strategies, including buyout and secondaries. Individual investors are shifting their exposure from public equity to opportunities in the private equity market as the universe of publicly traded companies continues to shrink and grow older. In the European Union, the number of publicly listed companies fell from its peak of 7,975 in 2001 to 6,538 in 2019, a decrease of 18%.9 In the U.S., the number of publicly listed companies has fallen from its peak of 8,090 in 1996 to 4,266 in 2019, a near 50% decline.10

As more companies are staying private for longer, there is an opportunity for individual investors to invest in private equity strategies and participate in the longer-term fundamental growth opportunities that used to be available in the public markets. In the first half of 2023, we witnessed a reset in private equity buyout valuations start to take effect, offering fund managers an attractive entry point to acquire and add value to portfolio companies. In addition, we have seen greater interest in private equity secondary funds, which can provide an entry point for individual investors seeking direct private equity exposure, but are concerned about the (sometimes significant) gap between making a commitment and receiving distributions.

Private credit

We have also seen growing investor demand for private credit investment opportunities, including in open-ended structures that offer periodic liquidity, such as non-traded business development companies (“BDCs”). Private credit financing is typically offered with interest payments at a spread above a floating reference rate, which moves in lockstep with the rate increases we have witnessed over the past 18 months. This floating rate structure mitigates interest rate risk for investors and provides protection in an inflationary environment.

Moreover, because private credit managers are typically able to achieve downside protection through due diligence and covenants in their loan agreements, these strategies are appealing to investors seeking uncorrelated sources of return to mitigate risk in their clients’ traditional public stock/bond portfolios. In addition, the non-traded BDC structure provides the opportunity for quarterly liquidity, providing more flexibility to individual investors that may be hesitant to invest in a closed-fund private credit structure.

Conclusion

The wealth management channel represents a multi trillion-dollar opportunity set, but accessing this client base requires support. As technology and product innovation expand access to alternative investments, advisers have the opportunity to produce improved investment outcomes for their clients. It is essential for fund managers to equip advisers with foundational and fund-specific educational resources, due diligence and tools to understand how alternatives fit within their clients’ portfolios. Technology- enabled platforms, like iCapital, connect fund managers and financial advisers with automated, end-to-end alternative investment solutions, allowing both parties to better achieve their goals and objectives.

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ENDNOTES

1. Preqin, iCapital Investment Strategy, data as of Dec. 31, 2022.
2. Bain & Company, Global Private Equity Report 2023, Feb. 27, 2023.
3. Bain & Company, Global Private Equity Report 2023, Feb. 27, 2023.
4. Cerulli, U.S. Intermediary Distribution 2023.
5. iCapital, 2023 iCapital Financial Advisor Survey, Aug. 17, 2023.
6. Cerulli, U.S. Alternative Investments 2023.
7. iCapital, 2023 iCapital Financial Advisor Survey, Aug. 17, 2023.
8. iCapital, 2023 iCapital Financial Advisor Survey, Aug. 17, 2023.
9. The World Bank, as of Oct. 6, 2023; Oxera, A Tale of Two Cities: The Rise and Fall of Listings, Jan. 28, 2021.
10. The World Bank, as of Oct. 6, 2023.

IMPORTANT INFORMATION

The material herein has been provided to you for informational purposes only by Institutional Capital Network, Inc. (“iCapital Network”) or one of its affiliates (iCapital Network together with its affiliates, “iCapital”). This material is the property of iCapital and may not be shared without the written permission of iCapital. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of iCapital.

This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as, legal, tax or investment advice, a recommendation, or as an offer or solicitation to buy or sell any security, financial product or instrument, or otherwise to participate in any particular trading strategy. This material does not intend to address the financial objectives, situation, or specific needs of any individual investor. You should consult your personal accounting, tax and legal advisors to understand the implications of any investment specific to your personal financial situation.

ALTERNATIVE INVESTMENTS ARE CONSIDERED COMPLEX PRODUCTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. Prospective investors should be aware that an investment in an alternative investment is speculative and involves a high degree of risk. Alternative Investments often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; can be highly illiquid; may not be required to provide periodic pricing or valuation information to investors; may involve complex tax structures and delays in distributing important tax information; are not subject to the same regulatory requirements as mutual funds; and often charge high fees. There is no guarantee that an alternative investment will implement its investment strategy and/ or achieve its objectives, generate profits, or avoid loss. An investment should only be considered by sophisticated investors who can afford to lose all or a substantial amount of their investment.

iCapital Markets LLC operates a platform that makes available financial products to financial professionals. In operating this platform, iCapital Markets LLC generally earns revenue based on the volume of transactions that take place in these products and would benefit by an increase in sales for these products.

The information contained herein is an opinion only, as of the date indicated, and should not be relied upon as the only important information available. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. The information contained herein is subject to change, incomplete, and may include information and/or data obtained from third party sources that iCapital believes, but does not guarantee, to be accurate. iCapital considers this third-party data reliable, but does not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. iCapital makes no representation as to the accuracy or completeness of this material and accepts no liability for losses arising from the use of the material presented. No representation or warranty is made by iCapital as to the reasonableness or completeness of such forward-looking statements or to any other financial information contained herein.

Securities products and services are offered by iCapital Markets, an SEC- registered broker-dealer, member FINRA and SIPC, and an affiliate of iCapital, Inc. and Institutional Capital Network, Inc. These registrations and memberships in no way imply that the SEC, FINRA, or SIPC have endorsed any of the entities, products, or services discussed herein. Annuities and insurance services are provided by iCapital Annuities and Insurance Services LLC, an affiliate of iCapital, Inc. “iCapital” and “iCapital Network” are registered trademarks of Institutional Capital Network, Inc. Additional information is available upon request.

©2024 Institutional Capital Network, Inc. All Rights Reserved. | 2024.02

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Marco Bizzozero

Marco Bizzozero

Marco is Head of International at iCapital and a member of the firm’s Executive Committee. He is responsible for the expansion and overall development of the firm’s business in the European and Asian markets. Marco received a Master of Arts (lic. oec. HSG) from the University of St. Gallen, Switzerland, and has served on the boards of the Swiss Bankers Association, Association of Foreign Banks in Switzerland, and the Swiss Finance Institute.

Kunal Shah

Kunal Shah

Kunal is Managing Director and Head of Private Asset Research & Model Portfolios, focused on the identification, selection, and due diligence of private market funds. Previously, Kunal was a Principal in the private markets group at Meketa Investment Group, a leading global investment consultant serving pensions funds, endowments and foundations, and family offices. He received a BS in Business Administration with a concentration in Finance from Drexel University. See Full Bio.