CAIS reaches $1B valuation with latest funding as alternative investment fintech stays hot

With multiple fundraising deals in recent weeks, the wave into alternative investments is showing no signs of crashing in the new year.

On Tuesday, CAIS, a digital platform offering financial advisors access to alternative funds and products, announced a $225 million round of funding led by Apollo and Motive Partners, with additional investment from Franklin Templeton. The additional funding values the New York City-based company, which was founded in 2009, at $1 billion.

The deal comes on the heels of Alto Solutions — a fintech company that lets retail investors and financial advisors use IRAs to invest in alternatives — closing a $40 million funding round, bringing its total funding to $70 million, according to Crunchbase. And just before the end of 2021, CAIS competitor iCapital Network raised another $50 million, bringing its total fundraising to $729 million and valuing the company at more than $6 billion.

“The market opportunity itself is just enormous and only getting more enormous,” said Matt Brown, founder and CEO of CAIS.

Alternative investments could account for 24% of the global investable market by 2025, up from 12% in 2018, according to the Chartered Alternative Investment Analyst Association. While less than 2% of the $30 trillion U.S. wealth market is currently invested in alternatives, there is currently a sea change of advisors allocating away from the traditional 60/40 model, Brown said.

“This is not going to be a one platform winner market,” Brown said. “Market forces and competitive forces just enable multiple participants to win, in the same way that there are three or four custodians, a bunch of TAMPs and reporting partners.”

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Asset managers looking to get alternative investments in front of advisors are no doubt a major part of the push. iCapital Network is backed by a who's-who of traditional asset managers — BlackRock, Goldman Sachs Asset management, JPMorgan Chase, Morgan Stanley and Wells Fargo, to name a few — as well as alternative asset managers like Blackstone, KKR and the Carlyle Group. Apollo, the alternative asset manager that led the CAIS fundraising round, also participated in iCapital’s in December.

An era of intense competition within wealth management has pushed asset managers to prioritize innovations around investment products rather than business models, said Josh Book, founder and CEO of ParameterInsights.

“Does this mean anything for the end retail investor above and beyond more jargon? Unequivocally, no,” Book said in an email. “Can alts somehow be differentiated to cut through the noise for advisors? Maybe.”

While the growth in alternative investments has traditionally been driven by asset managers, increasingly the demand is coming from financial advisors, said Brown. But there’s a third part of the equation: the client.

“What’s happening to the advisor community is because of the speed of information and democratization of everything, individuals are being exposed directly to all types of investment opportunities away from their advisors,” Brown said. “Advisors were unaware of this, so what they’re doing is getting up to speed quickly. They want exposure to digital assets, crypto, blockchain and alts.”

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But not everyone agrees that the increase in alternatives is good for retail investors. A study from fintech company M1 Finance found that people struggling financially are more likely to invest in alternatives than those who have reached financial freedom. These investors are also more likely to turn to social media for financial guidance, and about half of Generation Z and millennials say they have taken investment actions based on something off social media.

“It is almost impossible to scroll through social media or watch the news without hearing about someone hitting the jackpot through the latest meme stock or cryptocurrency,” M1 Finance founder and CEO Brian Barnes said in a statement. “It might seem at times like we have entered a new era of instant gratification when it comes to money management. But we’ve found that people are still prioritizing investing with a long-term focus.”

A separate study from Morningstar found that only 3% of investors are demanding cryptocurrency as a feature of retirement accounts. Even among younger investors, who were more likely to value cryptocurrency in retirement accounts than older generations, less than 5% indicated an interest in holding crypto as a retirement asset.

“People still tend to desire traditionally attractive features such as good employer matches and the availability of professional advice,” wrote Stan Treger, a former behavioral scientist at Morningstar and author of the report.

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The complexity and increased risk associated with alternatives can expose advisors to compliance violations. Advisor Group’s Triad Advisors was recently ordered to pay $705,000 for failing to supervise an alternative mutual fund that relied on uncovered options and lost 80% of its value during an “extreme volatility event” in 2018.

“The pitch was that these are non-correlated to the fixed income market or the equity market,” attorney Howard Rosenfield told Financial Planning. “It really wasn't for retail folks because it was a volatility bet.”

For advocates of alternatives, this is why platforms like CAIS, which provide education on alternatives as well as access to investing in them, are an important part of the equation. They can also make premium products enjoyed by financial institutions available to independent advisors and the clients they serve.

“We believe that individual investors should have access to the same alternative investment solutions as large institutions, and CAIS is doing just that through its innovative and user-friendly platform,” Franklin Templeton President and CEO Jenny Johnson said in a statement.