If you're an advisor who hasn't heard from clients with questions about
A pair of recent studies suggest investors are becoming both more curious about alternatives like private equity, credit and real estate and more eager to commit some of their money to these vehicles.
Similarly, the private investment firm Hamilton Lane found that more than 90% of 232 investment advisors it
Miguel Sosa, the head of market research and strategy at the New York-based alternatives firm BlueRock, said there's clearly a need for both advisors and their clients to learn more about private markets.
"In our view, every single investor, whether they invest in alternatives or not, should take an active role in the money that they are investing either directly or through an advisor," he said. "And educating themselves is in their best interest. So yes, absolutely, there should be more investor education, whether it's in alternatives or whether it's in stocks."
With interest in private markets running hot, here are some other numbers to ponder as you consider what's best for your clients.
Private market AUM
McKinsey has found that the amount of money in private markets has rocketed upward in recent years. Assets under management by private funds have gone from $3.8 trillion in 2014 to $13.1 trillion this year,
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Why advisors like alts
Cerulli's study suggests the main reason advisors recommend private investments to clients is to further diversify their portfolios. Nearly four out of five respondents to its survey cited diversification as their No. 1 goal with alternatives.
The second most common response — named by 57% of the survey takers — was the related objective of mitigating downside risks and dampening volatility. Only 45% of respondents named returns and investment growth as their top goal with private markets.
Hamilton Lane's survey found similar reasons for turning to private markets. Roughly the same proportion of respondents to its survey — just over 40% — cited both diversification and investment performance as their top goals with alternatives.
Benefits to diversification
Still
But an allocation of 40% in stocks, 30% in bonds and 30% in alternatives returned 9% over the same period. Upping the equity proportion to half the portfolio while reducing bonds to 20% produced even better results — a 9.5% yield.
Of course, the huge caveat in all of this is that some of those gains will have to go toward covering the higher fees that often come with private investments. Even for investors who can afford to have their money tied up for years in often illiquid vehicles, there's always the question of whether their returns justify what it costs to get into these opportunities in the first place.
Most popular alts
The most common private investments are alternative mutual and exchange-traded funds that make it relatively easy for investors to pull their money out, according to Cerulli's report. Nearly 55% of the survey respondents said they plan to increase their clients' allocations to ETFs holding private investments this year.
The second-most popular private investment on Cerulli's list was private equity; half the respondents said they want to see more money put into it this year. Then came private debt — 40% of the respondents said they'd like to move more into this part of the market this year.
Hamilton Lane's survey found that 90% of its respondents would like to increase their clients' allocation to private equity, 87% to private credit and just over 50% to private real estate.
Standing out with alts
When asked why they recommend private investments, the majority of respondents to Cerruli's study — 81% — said they agree with the idea that these vehicles help differentiate their practice. Around two-thirds expressed agreement with statements that it makes them more attractive to high net worth clients, helps them raise assets under management and aids in client retention.
