Why alternative investment platforms are winning in the independent wealth landscape

THE EMERGENCE OF PLATFORM SOLUTIONS FOR ALTS

In recent years, the emergence of platform solutions has given RIAs a new resource when it comes to managing their alts portfolios. ‘If we look back just ten years ago, firms didn’t have a choice between buy or build. There just wasn’t a platform they could partner with – and so they built,’ said Binoy Talati, managing director for enterprise RIAs at iCapital.

‘As we fast forward to today, market leaders like iCapital are addressing the industry’s needs and resources on a very different scale to any that an individual firm could implement. We have an emphasis on technology, with more than 500 dedicated employees working every day to advance our platform.’

Weighing up the relative merits of partnering with a platform such as iCapital compared with building your own internal platform is a vital decision for RIAs. Cost, time to market and, above all, the ability to build a platform that is fit for purpose emerged as the key considerations in the decision-making process.

FIT FOR PURPOSE – ADDRESSING THE CHALLENGES RIAS FACE ALONG THE JOURNEY

Within the fit-for-purpose bracket – according to Citywire research – keeping up with rapidly evolving product development and regulations across hedge funds, private equity and structured investments are highly time-consuming tasks that RIAs find onerous.

‘This is an area where the iCapital platform is designed specifically to address. Once you build an alternatives operating system, it’s not ‘set it and forget it’ – instead, firms need to continue to update that technology stack to deliver alternative investment products effectively, especially as regulation and product construction both continue to evolve,” Talati said.

ACHIEVING CLIENT OBJECTIVES – COMPARISONS GIVE A VITAL EDGE

Also under the fit-for-purpose heading, advisors will typically spend a significant amount of time at the initial stage identifying which alternative assets best complement their clients’ objectives and constraints.

Objectives can range from adding uncorrelated sources of upside return to diversification or downside protection. ‘Advisors really need to understand what each alternative asset class can bring to a portfolio in relation to the rest of their portfolio,’ said Anthony Polemis, head of architect business development at iCapital.

The biggest single challenge RIAs experience around the implementation of alternatives into client portfolios is the ability to model private assets, according to 64% of respondents in Citywire’s survey. The ability to run side-by-side portfolio evaluations on return profiles, volatility estimates, and portfolio stress tests are not as readily available to advisor firms in the alternatives space as they are in the public assets.

‘Until we built our portfolio construction tool, Architect, advisors didn’t have a great solution for modeling alternatives. Analyzing these assets is not as straightforward as modelling public assets,’ Polemis said.

‘Within private asset categories, fund performance can diverge significantly, so the standard approach of proxying private fund performance with indices has drawbacks. If you’re looking to model private funds individually, it can be difficult to source historical return data.

‘Oftentimes, we see funds with a short time series of returns – sometimes return history is even missing altogether if these products are structured as drawdown vehicles. Making sense of this limited amount of data can be a challenge,’ he said.

To overcome these challenges, iCapital has more than 30 experts, including a dedicated team of quant scientists, working on Architect. The tool gives advisors the ability to model their client portfolios and layer in specific funds from their iCapital menu to compare historical performance, volatility, liquidity, and risk factor exposure.

‘Our research team has also created an outcome-oriented, balanced model portfolio of alternative funds that is multi-asset class and multi-manager. In the future, we’re looking to launch more models with different goals and objectives.

‘Using Architect, with the click of a button, RIAs can incorporate one of these allocations into their clients’ public portfolio pro-rata and evaluate its impact,’ Polemis said. ‘Advisors can make tweaks if they want to, discuss outcomes with their client, and ultimately make an investment decision.

‘We’re bringing solutions – model portfolios and portfolio construction tools – that have been available in the public space for a long time, into the private market as well.’

COMPLIANCE, RESEARCH AND EDUCATION

Over 60% of investors in Citywire’s alternatives survey cited educational resources and programs, and finding the time for private markets education as a barrier to adoption. Compliance, education at the fund level and the growth in evergreen funds, which keep evolving from product launch to perpetuity, are additional challenges.

Strategy, fees, risks, and sometimes even structures don’t necessarily remain the same. ‘Investment product or fund level training is extremely important. It’s one thing to understand private equity on a foundational level but it’s very different to really understand the ever-increasing number of available funds, structures, and attributes, let alone determining which ones might be best for clients,’ said Mike Kell, senior vice president for alternative solutions at iCapital.

Fulfilling regulatory requirements while learning how to set client expectations around illiquidity, fee structure and portfolio fit is another important strand of iCapital’s partnerships with advisors. ‘With iCapital Insight, we offer a fully integrated state-of-the-art learning management system (LMS) to deliver foundational education, including an award-winning alternatives certificate program developed in partnership with CAIA, and fund-level training, based on the largest universe of private wealth-focused funds,’ said Kell.

‘We also have an experienced in-house research team that diligences funds, keeps its pulse on the industry, and produces valuable thought leadership pieces, while our chief investment strategist, and team, continuously generate timely insights on topics such as the macroeconomic environment and its impact on alternative investments.’

COSTS – ECONOMIES OF SCALE MAKE A DIFFERENCE

The costs of developing a proprietary operating system tend to be prohibitive factors as they typically run into hundreds of thousands of dollars, survey respondents say.

The advantage of a platform like iCapital is that the investment has already been made. This enables it to build white-label and/or customized solutions for clients as they require.

‘Our platform is a single-instance multi-tenant platform. We deliver one core-technology operating system, which we then white-label for each of our partners,’ explained Talati. ‘Customization tends to be more popular today than previously. To date, we’ve delivered more than 250 white-labeled solutions, so we have experience with the many kinds of customization that clients often look for and can provide these off the shelf.’

TIME TO MARKET

‘There is a huge investment involved in building an end-to-end platform, which then of course must be constantly maintained. We have over 500 people who work full-time on building and constantly improving our tech platform. For any individual firm, that is very hard to replicate in any reasonable timeframe,’ Talati pointed out.

PLATFORMS CAN SOLVE RIA HEADACHES

Overall, the structural advantages platforms can provide when addressing the main hurdles of cost, time to market and fitness to market explain why they are becoming a mainstay of alts investing for RIAs. A further point, given the trend for expansion and consolidation within the RIA landscape, is that a platform like iCapital provides exceptional scope for RIAs to scale up their business.

‘Our aim is to provide a platform that can grow with your business,’ Talati said.