Non-traditional assets, which run the gamut from private equity and hedge funds to antiques and real estate, are typically the province of large institutional investors, not affluent individuals, according to a study released Tuesday by Preqin.
That's an
"Alternative investments present wealth managers with a significant opportunity to produce better investment outcomes for their clients," the "Fundraising from Private Wealth: A guide to raising capital" report said. Despite the benefits, "individual investors are poorly represented in the alternative investment capital base."
Cameron Joyce, a senior vice president and deputy head of research insights at Preqin, said in a statement that "most fund managers are so far only scratching the surface compared with the potential that the private wealth space offers. We are seeing larger fund managers leverage scale and their brand to raise capital directly from high-net-worth individuals." Joyce added that the emergence of digital platforms is bringing retail investors into the space.
Last year's depressed stock and bond markets automatically nudged up many high net worth investors' allocations to private markets. It's a major shift of dollars away from public markets and into private funds and securities. Preqin said alternative fund managers are encouraging individual investors to ditch the traditional 60/40 stock-bond mix, and instead embrace a 50% equity, 30% bonds, 20% alternatives composition.
One drawback: While institutional investors grasp that alternative investments can win big as well as lose big, "there are significant risks that may not readily be understood by non-institutional investors, such as the illiquid and complex nature of private market investments," Preqin wrote.
Dan Herron, a certified financial planner who's the founder of Elemental Wealth Advisors in San Luis Obispo, California, said that alternatives can provide "great diversification dynamics." But not all investors are comfortable getting into, say, a commodities fund with a sophisticated trading strategy using derivatives.
"We allocate housing to our clients," he said, adding that "The caveat before you invest is, understand what you're getting into."
Here are the Preqin study's main takeaways for wealth advisors with affluent clients:
Trillion-dollar size
Preqin estimated that the global private wealth industry could be $130 trillion and includes mass affluent investors with up to $1 million of investable assets, as well as high net worth and ultrahigh networth individuals and family offices.
Splinters
Fragmentation of the wealth management industry, in which roughly
"Fund managers face substantial headwinds when it comes to accessing the fragmented wealth management channel, given unique educational and coverage considerations," the Preqin report said.
Managers of alternative funds "are so far only scratching the surface compared with the potential that the space has, and larger funds "are leveraging scale and brand association to raise capital directly from high net worth individuals."
Less than 5%
"So far, allocations to alternative investments by individual investors have been kept below 5% in many instances, Preqin said. "This is unlikely, however, to be entirely through a lack of demand. High minimum investments, a lack of access to higher-quality" fund managers "and cumbersome paperwork have been some of the main barriers to more investment flows from individual investors into alternatives."
Big asset managers court individual investors
The report said Preqin expects private capital fundraising, meaning raising dollars for funds, "to become increasingly focused on the non-institutional space, and especially on private wealth. KKR, arguably one of the market leaders in this, has to date raised 15% of its capital from individual investors" and expects that to increase to 30–50% in coming years.
Fund managers "are starting to pivot their fundraising efforts toward the non-institutional space and the private wealth industry appears to be the part of the market with the most traction right now."
KKR has raised $66 billion from individual investors so far and "expects between 30% and 50% of fundraising to be from the space over the coming years." Apollo Global Management aims to raise $50 billion of retail capital by 2026.
Private equity loves alts
Private equity powerhouses, including Blackstone, KKR and Apollo Global Management, have seen fees from traditional private equity deals decline as a share of their total income. Fees at KKR fell double digits over the past seven or so years as managers pivoted away from raising money to buy private companies and toward rustling cash from investors for infrastructure, real estate and private debt deals.
Relaxed SEC rules
In 2020, the Securities and Exchange Commission slightly expanded the opportunity for individual investors to invest in private markets and securities, where alternative assets live.
Before the regulator's rule change, only an "accredited" investor, defined as having at least $1 million in net assets, not including their primary home, or at least $200,000 in annual income, could invest in alternative funds. The thinking was that investors had to be flush enough to withstand any losses from funds operating in the lightly regulated private markets.
Now some other investors, including those with a basic stockbroker's license, can sidestep those financial thresholds.
The change came as the SEC proposes new rules that would require registered investment advisors, or RIAS, to bolster their transparency around fees and performance, including for private market funds they put clients into.
"New fund structures are emerging that allow individual investors greater access to alternatives, while also trying to protect their interests," the Preqin report said. "This represents a phenomenal opportunity for the alternatives industry."
In response, private equity funds are "increasingly providing retail access through what are known as '40 Act registered investment vehicles, which allow retail access without the traditional lock-up" of invested dollars.
New places to find alternative investments
"New fund structures are emerging that allow individual investors greater access to alternatives, while also trying to protect their interests," the Preqin report said. "This represents a phenomenal opportunity for the alternatives industry."
Digital platforms are also emerging. CAIS, iCapital, Moonfare and Rocket Dollar are among the new distribution channels for investors and wealth advisors to invest in alternative assets. The platforms democratize a process in which asset managers typically hire fundraising professionals, or placement agents, "with an extensive network of family offices and a track record of successful capital raising," Preqin said. "In our view this is often the best strategy, given the relative opacity" with this specific type of secretive investor.
