Alison Nest thinks some of Morgan Stanley's clients could benefit from having as much as a quarter of their portfolios in private equity, private credit and similar investments.
Now one of her main goals as managing director and the
"And today at Morgan Stanley, it's much below that mark," she said. "So we think that there's a really rich opportunity here to increase our client penetration levels and to really grow that business because we certainly view it as a differentiator for us."
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But a dearth in recent years of companies selling stock for the first time through initial public offerings and similar deals means many of the newest opportunities are now coming open on the private side.
Nest said she thinks firms like Morgan Stanley can be particularly useful for clients who are interested in the often strong returns promised by private investments but remain wary of their pitfalls. Skeptics of private equity and private credit point out these vehicles' often high fees and barriers to pulling money out.
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Nest said experienced advisors can play a big role in helping investors come to terms with these complexities. That's not only in sizing up individual clients' net worth, liquidity needs and tolerance for risk and then matching them with suitable investment vehicles.
It's also looking at the historic returns of various options and seeing if those justify the higher fees that are charged or private markets' common requirement that invested money stay locked up for years. Nest said
"If you look at it, there's an average difference in annualized return of about 14% between top and bottom quartile managers," she said. "By comparison, for traditional managers, the average difference is only about 1.1%. So because of the importance of manager quality, we really devote a lot of deep expertise into analyzing performance, performing due diligence on alternative investment managers across all these different asset classes."
Nest stepped into her current position in January after nearly 20 years in the industry. She came to Morgan Stanley in 2009 when it acquired her former employer, Smith Barney, where she had started her career in 2004 as an analyst.
Over the years, she has served as Morgan Stanley's head of strategy, business development and risk and head of offshore and private wealth management product strategy. She has also been the chief financial officer off various business units in Morgan Stanley Wealth Management.
Nest recently sat down with Financial Planning to discuss opportunities she sees for both advisors and clients in private markets.
This article has been edited for clarity and brevity.
Financial Planning: What's changed with Morgan Stanley's private market offerings over the years?
Alison Nest: We launched our business in 1977 with the founding of the Morgan Stanley real estate and Morgan Stanley managed futures business. And to say the industry has evolved dramatically since then, including at Morgan Stanley, is quite the understatement.
Today, we've expanded to a diverse product set. We have about 200 offerings across a variety of different asset classes. That includes real estate infrastructure, private equity, private credit, hedge funds.
More and more our goal is really to make sure that we have investments that can help our clients align to their goals to help them achieve them. And I'd say this approach and having a truly open architecture platform has really been rewarded by the market.
FP: What would you say distinguishes your private market offerings?
Nest: About 70% of our new offers are either first looks or exclusive opportunities for our clients, which is really part of our competitive advantage. So today, we stand at a little over $180 billion in alternative assets on the platform. And again, our mission is really to help build and make available to our qualified client base the highest-quality open architecture platform of alternative investments in the world. Which is why our mantra is really about leading this evolution with investor choice.
FP: What sort of private investments do you favor?
Nest: We are focused on, I'd say, four different themes. There's portfolio diversification and making sure that we constantly have new alternatives that can help maintain low correlation with traditional equity markets with the potential for lower portfolio volatility. Some examples of that are your absolute return hedge strategies, equities long and short, funds of funds, relative value, infrastructure and alike.
We are also looking for alternatives that aim to generate excess returns and provide clients with incremental upside or seek to take advantage of the illiquidity premium of private markets. So some of the areas that we focus on are private equity strategies such as venture capital growth, equity, leveraged buyout and secondaries and co-investment.
Tax advantage is another area which has been huge for us. And we continue to look for different opportunities within this space, because we know it's incredibly important for our client base. So we're looking for ways to either alleviate the yearly tax liability, to defer payment of capital gains, to harness tax managed structures or offer a step up. Some of the areas where we continue to evolve are private placement variable annuities, private placement life insurance. We just recently rolled out some new insurance-dedicated funds to help with this.
And I'd say the last piece that we focused on in terms of one of the goals of our old space is income generation. And these are obviously offerings to seek higher yield and lower volatility versus traditional fixed income with potential for a low correlation relative to stocks and bonds, with a reliable income stream and an inflation hedge. Some of these are in non-traded REITs, credit strategies such as direct lending, which has been a focus of late.
FP: What advantages does a firm like Morgan Stanley enjoy with private markets?
Nest: Alternative investments obviously can include a lot of private or exclusive opportunities that depend on relationships, networks and deal flow. And this is an area of investing where leadership really matters. Our own is built on our team's expertise, our unique channels that we have and trust generated really from the commitment of our clients. And all this is really backed by the history, scale and our network here at Morgan Stanley. So many of the most compelling ideas and managers end up coming here first.
FP: How do you decide who is a good fit for private investments?
Nest: We always go back to making sure that any alternative investment, or really any investment within a portfolio, ties back to helping investors achieve their financial goals. I think private markets make sense for the right clients. You can think about portfolio diversification or a growth orientation as two goals. Or some clients looking for tax advantage solutions may have high embedded gains in their portfolio and are looking to alleviate their yearly tax liability, which could be solved by a private market investment opportunity. Or some clients may be looking for a more steady stream of income or an inflation hedge. So it really depends upon the client's financial goals.
FP: What changes have been made to these investments to open them to more clients?
Nest: Alternative investments were traditionally only available to ultrahigh net worth investors. The access has significantly improved as both demand and product choice have grown. Of course, qualification criteria still apply.
But we've started to create products with reduced eligibility cutoffs, lower investment minimums, greater liquidity and really attractive pricing that may otherwise have only been available to institutional investors. The minimum investment for certain of these starts as low as $10,000.
One of the things that we also focus on as these fund structures continue to become more democratized is education. So Morgan Stanley, alongside the entire industry, has devoted a significant amount of energy to improving the availability of education to all, particularly as these new more democratized structures become more accessible to our clients.
