It's no secret that asset managers are making a big push to catch growing demand for alternative investments in the retail channel.
Big-name alternative asset players that have traditionally served institutions and high-net-worth investors, including KKR AND The Black Stone, have released products that are steadily attracting fund flows. Specialized providers like Cliffwater LLC AND BlueRockwhich focus only on semi-liquid vehicles designed for retail investors have also made their mark.
But there is another increasingly popular tactic of traditional asset managers forming partnerships or joint ventures with specialist alts managers to gain access. In these arrangements, traditional asset managers are leveraging the capabilities of specialist alternative managers to build and manage products while providing their established distribution pipelines to reach advisors and end investors.
That's one of the findings in a new research report from Cerulli Associates, US Alternative Investments 2024which examines the general state of alternative investments in the wealth channel.
“An important thing to remember is that traditional managers have a large number of wholesalers; they have tremendous distribution power and reach retail channels that alternative managers may not have,” said Daniil Shapiro, director of product development with Cerulli and one of the report's authors. “It's the strong relationships with financial advisors, the large distribution resources — that can be a strong plus in a partnership with an alternative investment firm.”
An example of this strategy is Franklin Templeton, which has acquired or partnered with a number of specialist investment managers, such as Clarion Partners, a private real estate investment manager, and Benefit Street Partners, an alternative credit manager, among many others. others.
Another recent example is Capital Group Companies, which formed a joint venture in May with KKR to develop new public/private hybrid products focused on credit, equity, infrastructure and real estate for mass affluent investors. The first products from the partnership are expected to debut in 2025.
According to Cerulli, such partnerships allow the firms involved to expand their reach. The firm found that 53% of asset managers it surveyed currently rely on such partnerships and another 50% plan to increase their reliance on them.
Overall, the report estimates that today, financial advisors hold $1.4 trillion in semi-liquid assets. By the end of 2028, this figure may increase to 2.5 trillion dollars. Additionally, in 2023, asset managers surveyed by Cerulli said they sourced 13% of their alternative assets from the retail channel. They plan to increase this figure to 23% by 2026.
Many alternative asset managers continue to focus most of their fundraising efforts on institutional investors, Shapiro said. At the same time, financial advisors still need significant education on how to use and access alternative investment products and more popular brands in order to market these investments to their clients. Well-known alternative asset managers such as Blackstone, KKR or Carlyle, among others, can be very attractive to retail investors considering investing in alternatives.
“These alternative managers probably many times resonate with clients as an exposure that they don't currently have access to,” Shapiro noted. “It's certainly possible that you could use one of these partnerships to take a brand that an advisor trusts and combine it with a brand that an advisor really wants to access.”
Cerulli's researchers found that while advisors' use of alternatives has been on the rise, there are still some barriers to large-scale adoption. Advisers' low allocation to alternatives may be among the biggest, with 60% of asset managers identifying it as a delivery challenge. Another 52% of asset managers noted the need for more education for advisors on the use of alternatives. Lack of brand name when it came to distributing alternatives was cited by 42% of asset managers and 39% cited insufficient distribution strength.
Meanwhile, the majority of advisors (55%) cited the limited liquidity of alternative products that are not suitable for their clients as one of the important challenges in allocating alternatives. Another 45% said it was challenging to perform due diligence, given the complexity of alternative products. In addition, 37% of advisors cited fees for alternatives as too expensive and subscription/redemption processes as a challenge to their adoption.
Asset managers said that in conversations with advisors, they placed a high value on basic education for a given asset class, with 77% of asset managers citing it. This was followed by instructions on portfolio construction (69%), education on how to discuss alternatives with clients (54%) and education on product structures (50%). Other topics on which advisors most valued education included how to access alternative investments (46%), guidance on market strategy (35%), deep dives into specific sub-sectors (27%), impact of inclusion of alternatives in general business (23%) and guidance on alternative investment fees (8%).
At the same time, only 21% of advisers Cerulli surveyed said they didn't know enough about alternative investments. The firm's researchers speculate that some may overestimate their level of knowledge — “No one necessarily wants to admit they don't know something,” according to Shapiro — though another segment of advisers may also face implementation challenges in adding alternatives to portfolios. Theirs.
Interval funds have emerged as the biggest opportunity among semi-liquid alternatives for alternative asset managers to retail investors. Cerulli found that 76% of asset managers identified it as a vehicle with a large distribution potential for alternative investments. Other significant distribution opportunities for alternative products in the retail channel include limited partnerships (according to 62% of asset managers) and non-traded BDCs (according to 61% of asset managers). Tender-offer funds and main-feeder funds are some way behind, with 44% and 38% of asset managers citing them, respectively.