Alternative investments – such as private equity – have largely been the cornerstone of institutional investing and very wealthy private investors.
But retail investors and their advisers have also started to see the attractive nature of the alternatives market. However, they have faced significant barriers such as high investment minimums, difficulty identifying and accessing top-tier asset managers, a cumbersome, paper-based investment and subscription process.
Other barriers include manual client servicing and reporting and administrative complexities, lack of transparency, investment research and education, and a disconnected ecosystem.
One firm is looking to change this for the retail investment market. Fintech platform ICapital has partnered with many investment houses and asset managers, including Ardian, Axa Investment Managers, Tikehau Capital and Pemberton.
These partnerships have looked to remove historical barriers and make it significantly easier for wealth managers and their clients to access private markets investments.
Demand
During each week of 2022, we would receive a press release about how alternatives are now starting to change the investment landscape leading to the supposed end of the 60/40 portfolio.
But why have alternatives become such as key cog for retail investors?
Marco Bizzozero, head of international at ICapital, said to International Adviser: “Alternative investments have significantly increased in importance resulting in a significant portion of value creation taking place outside of the public markets as companies stay private longer.
“Because of the potential to enhanced return and diversification benefits, wealth managers now have a sense of urgency and responsibility to act – they are making private markets a key strategic priority.
“We believe the historical bottleneck in this industry in terms of having access to private markets was the significant amount of manual admin work – which is more likely prone to errors – which the adviser had to face when investing in private markets. As a result of this, advisers used to be less open to explore alternative investments for their clients because it was much more cumbersome compared to just subscribing to a liquid mutual fund.
“Because of the many historical barriers preventing individual investors from accessing private markets, most wealth managers across all markets are at the beginning of their journey to include private markets in a diversified portfolio.
“We believe that many wealth managers across all markets are making private markets a strategic priority as it is an asset class that can potentially improve diversification and achieve better risk-adjusted returns. New technology solutions are now available to enable wealth managers to facilitate access to this asset class.”
Breakdown of alternatives market
Recently, the Boston Consulting Group and ICapital found that high net worth individuals are expected to increase their capital commitments to private equity at a rate which will outpace institutional growth in the asset class, with a compound annual growth rate of 19% by 2025.
By 2025, HNWIs will account for more than 10% of all capital raised by private equity funds and the total assets under management of individual investors in private equity will be 2.4 times larger than today, rising to $1.2trn (£1trn, €1.13trn).
So, what types of alternatives are most in demand? Is it all about private markets?
Bizzozero added: “We believe that in this environment with increasing interest rates and inflation an allocation to private markets potentially improves the quality of a portfolio and offers an opportunity to improve risk-adjusted returns and diversify away from public equity markets.
“For private equity, we believe the current valuation reset offers attractive investment opportunities to build up a long-term private equity allocation with healthier entry valuation levels.
“We also believe assets like infrastructure, real estate, and direct lending can improve the inflation resilience of a portfolio. For hedge funds, we believe macro strategies can potentially perform well in recessionary scenarios.”
Regulation
The rise of retail investors in the alternatives market is a rather new concept. Therefore, the regulatory framework may not be in place to make sure that retail investors are supported and protected.
Bizzozero said: “We are seeing regulation developing at different rates around the world and our experience is that changes in regulation, while tending in the same direct, have been uneven between markets.
“However, we believe there is a growing emphasis on updating regulatory frameworks to facilitate access and to enable individual investors to invest in private markets and benefit from a wider scope of potential investment opportunities.
“We believe this needs to be coupled with education in the regulations and the various asset classes for individual investors.”
Future
ICapital has made great strides to improve access to alternatives investments – but the firm said it has global ambitions.
“As the demand for alternative investments continues to grow among wealth managers, we continue to focus on meeting the industry’s needs by building out our team in new regions, improving our technical capabilities, and offering the highest levels of support for our partners and clients,” Bizzozero added.
“We are expanding our business globally and more than 20% of our clients’ assets are already international and more than 200 employees are outside the US in our six international locations in Zurich, London, Lisbon, Hong Kong, Singapore, and Toronto. We plan to significantly grow our international franchise following our clients’ needs.
“We will be looking to drive the next generation in operational efficiency, security, and convenience through initiatives such as the distributed ledger technology consortium that we announced earlier this year, and we will continue to expand the range of funds we offer to meet the needs of a broader group of individual investors.
“In addition to feeder fund across all strategies within private markets and hedge funds we cover among others direct co-investments, ESG/impact, and structured products.
“We are expanding our offering to cover all client segments from the professional investor to the affluent individual investor. With our technology and solutions, we are supporting our clients with new fund structures, enabling a real change how clients experience alternative investments in a similar way subscribing a traditional mutual fund.”
