The following interview was first featured on Private Equity International.
Q: Just how big is the democratisation opportunity for private markets fund managers?
Lawrence Calcano: The industry is looking at a huge market opportunity. While the amount of wealth held by individual investors has historically trailed institutional assets, according to Bain research, individual investors globally hold about $145 trillion. It is an enormous pool of capital.
We have started to see real momentum in increasing allocation to alternatives over the last decade. However, the private wealth channel nonetheless remains underallocated to alternatives, with allocations still in the low/ mid-single digits. We estimate that about 25 percent of advisers drive 70 percent of the volume.
The CIOs of major wealth managers typically recommend allocating somewhere between 15-30 percent of a portfolio to alternatives. This allocation target is significantly ahead of where many advisers and their clients are investing. If we can start to close that gap by enhancing the client’s user experience through technology solutions, there is a major opportunity for asset managers to bring great products to market in order to meet advisers’ unique investing needs and goals.
Q: How is economic uncertainty and stock market volatility affecting appetites for alternatives among individual investors?
LC: I remember in 2022, when markets were turbulent, sitting with many financial advisers who said that this was the time they really wished their clients were more allocated to alternatives. Not only do alternatives present the opportunity for higher returns as a longer-term hold, but they also create greater diversification in portfolios. The more volatility you see in the markets, the more people value that diversification and create durable portfolios.
When the Fed started raising rates after covid-19, people pivoted to private credit: most of the private credit strategies were floating rates, so they had an inherent hedge against interest rate increases. Also, credit is shorter duration than equity, and most people preferred that in the market conditions that prevailed in 2022 and 2023.
Now, we are seeing a pivot again. While investors continue to allocate to private credit, we are seeing more people starting to allocate to growth equity, as well as continuing interest in secondaries. Individual investors like how secondaries tend to be shorter duration and generally start returning capital sooner.
Q: How are technology and other product innovations affecting private wealth investors’ ability to invest in alternatives opportunities?
LC: Technology and product innovations are significantly transforming the alternatives investing experience for private wealth investors. Innovations such as AI-driven analytics, API technology and integrated digital platforms are not only improving access to a wide range of investment options, but are also enabling financial advisers and their clients to make more informed and efficient decisions at a reduced cost.
Technology is ultimately the engine behind private wealth investors being able to better navigate the complexities of alternative investments and achieve their unique financial goals with greater confidence and precision.
From a product perspective, there has been tremendous innovation in the last decade. Historically, the main type of client investing in private markets were qualified purchasers (QPs). They typically benefited from feeder structures or made investments directly into QP-orientated funds. Now, we are seeing a trend where more advisers with accredited investors in their client base are interested in alternatives; these investors require a different fund structure to access private markets.
Perpetual registered products have also become increasingly important in making alternatives available to a wider range of private wealth investors. We continue to see technological innovation across a number of registered products to create the right kind of exposure for a newer wave of inves- tors, meet the continually growing needs of investors and ultimately scale investments in products that have been more complicated to learn about.
The technology that companies like iCapital are bringing to market is focused on helping to create a simpler and better user experience. Our technology is designed to meet advisers and investors where they are by making these assets easier to understand, buy and manage.
For example, many advisers and clients use model portfolios to invest in the public markets, so we developed alts models that allow people to incorporate private markets assets into their traditional portfolios through a model structure that they are already very comfortable with. What’s more, iCapital’s technology allows advisers and their clients to analyse and understand what happens if they add alternative products to a portfolio, what happens to the portfolio relative to the goals and objectives that have been set for that portfolio and how this impact changes depending on the specific strategy allocated to (eg, private equity vs private credit).
We believe it is important for the industry to have access to portfolio construction tools and modular technology that allow advisers to build and customise their own models based on specific client needs.
Q: To what extent are you seeing greater convergence of liquid and illiquid asset classes?
LC: The convergence of liquid and illiquid asset classes is driven by client demand for products and solutions that provide the flexibility needed for client portfolios. Technology solutions can help with adoption and customisation for clients. We are seeing firms experiment with partnerships, either creating product sets or combining products to support future scale.
Over time, people are going to stop thinking about these products as ‘alternatives’ and are simply going to look at their portfolio and see liquid and illiquid equity products, liquid and illiquid credit products and so on.
From an asset manager perspective, the leading managers in private equity have historically achieved returns exceeding those seen in the stock market. Similarly, private credit managers have also exceeded the returns from more liquid credits. So, it will be important for private managers to continue to demonstrate their ability to generate alpha for their underlying investors, and it will be interesting to see how these partnerships evolve.
Overall, the trends are very positive. Technology ensures a great user experience, as a lot of people are thinking about how to collaborate and figure out investment exposures that create great customer outcomes.
Q: What are the biggest challenges in increasing private wealth allocations to alternatives?
LC: Education remains a cornerstone of our industry as both advisers and clients continue to navigate the complexities of investing in alternatives. Advisers and their clients are seeking accessible resources to understand alternative investments; they need education and tools to understand how these products work and operate, their liquidity characteristics and how they might fit together in a portfolio.
Our approach includes offering a range of learning solutions that cater to different levels of experience and expertise. We focus on foundational education, investment product education and thought leadership to ensure advisers are well equipped to navigate the complexities of alternative investments. Additionally, our platform connects wealth managers and advisers with a broad menu of alternative investment opportunities helping them understand which products work best for which clients and providing them with the tools and knowledge they need to confidently explore, invest in and manage alternative investments efficiently.
