Firms jostle to sell alternative assets to wealthy investors

The race is on to sell unlisted assets to wealthy individual investors.

BNY, the giant custody bank, on Monday announced plans for a platform that makes it easy for financial advisers to buy and manage investments for their clients in a swath of products from well-known private equity, private debt and infrastructure firms.

That comes on the heels of three much-trumpeted partnerships between gigantic traditional asset managers and well-known alternative investment firms that take aim at the rich end of the retail market. Tie ups between BlackRock and Partners Group and State Street with Apollo were announced last week, while Capital Group and KKR struck a groundbreaking deal in May.

The financial firms are all trying to hitch their wagons to a fast-growing area of the market that can generate hefty fees. They are also adjusting to a fundamental economic shift in which more companies have delayed or forgone public listings while nonbank lending has expanded.

“For an investor who wants to own the whole market, more and more of the market is private,” said Brian Moriarty, strategist at Morningstar, the fund research firm.

So far, the investors in private markets have overwhelmingly been pension funds, endowments and other institutional investors. While many have racked up big gains, they are starting to limit or even trim their exposure to alternatives.

Just 13 per cent of alternative firm assets came from retail clients in 2023, but that share is expected to rise to 23 per cent by 2026, according to data firm Cerulli. By 2028, financial advisers are expected to be managing $3.6tn in alternatives for their individual clients, up 50 per cent from $2.3tn last year.

Traditional asset managers and financial infrastructure companies want a piece of that pie. They also want to hang on to their customers as they move into new markets. So they are partnering with alternative shops to find solutions.

“This is something that the market is asking us for,” said Holly Framsted, Capital Group’s global head of product development. “We are aiming to create a new space here and a new category for wealth investors,” she said.

Analysts and investor groups warn that there are significant risks and challenges ahead. They are concerned about the implications of selling assets that are inherently illiquid and hard to value to retail investors, who are used to uniform disclosure and easy access to their money.

Not only are many of the offerings untested in volatile markets, but private fund fees have historically been complex and much higher than traditional mutual and exchange traded funds (ETFs).

“Investors need to understand that the private markets don’t have the same degree of transparency, and the whole structure is different,” said Ben Schiffrin, director of securities policy at investor protection group Better Markets.

One early private market success story, Blackstone’s wildly popular Breit real estate fund, pulled in tens of billions of dollars from individual investors but then had to limit withdrawals for months when redemption requests exceeded monthly caps.

The various new ventures are experimenting with different ways to give retail investors access to the higher returns that private assets can provide without sacrificing all of the liquidity and investor protections that retail investors expect from public securities.

When it launches this autumn, BNY’s platform will allow registered investment advisers and independent broker dealers to buy, value and manage alternative investments. It has already signed up nearly two dozen private market specialists and arms of larger groups including Carlyle, Blue Owl, Franklin Templeton, Invesco and Goldman Sachs.

“We are going to be the intake valve to the wealth community, and hopefully bring the same sorts of methodologies and rigour that you expect in public markets into private markets,” said Akash Shah, BNY’s chief growth officer. The goal is “to give the clients a true sense of what they are exposed to and how”.

State Street has filed for US regulatory permission to sell an ETF that holds both public and private debt sourced from Apollo. The structure would be groundbreaking because ETFs offer daily trading but some of the underlying assets could be hard to sell, analysts said. The sponsors said in the application that Apollo has signed up to buy and sell the private debt when the fund needs to redeem or add more shares.

“This could work . . . but that requires a size, liquidity and market depth that who knows if it exists or who knows if it disappears one day,” said Morningstar’s Moriarty.

BlackRock and Partners Group took the leap on their offering after Partners CEO Dave Layton went to the annual Milken conference this spring and was astounded by all of the talk about selling private assets to individuals. They plan to offer financial advisers packages of investments, known as model portfolios. That approach can be used to give clients diversified exposure to alternatives that can be adjusted rather than putting all their money in a single fund.

“When you see a rush of product sales into a hot category, it often doesn’t end well for the clients. What we are trying to do is provide a more disciplined approach that we can look back on and be proud of,” said Mark Wiedman, head of BlackRock’s global client business.

That approach could also have pitfalls, analysts warned. “Model portfolios are a new frontier . . . Managers must work through the key challenges of rebalancing the underlying illiquid exposures and ensuring adviser understanding of limitations,” said Daniil Shapiro, Cerulli’s director of product development.

The Capital/KKR project involves launching a suite of products in the first half of next year that combine bonds managed by Capital with private debt managed by KKR into interval funds that offer periodic chances to sell rather than daily trading.

“Education is hugely important,” said KKR partner Eric Mogelof. “It’s really important for advisers and their investors to fully understand the structures . . . How they work, how they could help investors, what the liquidity conditions are, and obviously understanding the overall risks as well.”