Advisors seeking to shake up standard portfolios or provide a hedge against market downturns are increasingly inquiring about alternative assets – dreams of non-correlated outperformance dancing in their heads.
‘This is a really interesting time to own private investments,’ said Verdence Capital Advisors chief executive Leo Kelly. ‘We look at the market today and we see extended valuations in public equities, we look at virtually no income in fixed income, and no spread in high yield. So that’s a challenge. For us, putting money in alternative investments gives us unique opportunities that a fully public portfolio doesn’t.’
Alternative asset marketplaces are increasingly ready to answer the call. Boutique consulting firm Hillson Consulting called the independent RIA space ‘one of the most untapped sources of capital’ for the alternatives market.
‘Incumbents are understanding now and seeing the opportunity within the retail market and bringing product downmarket to satisfy lower investor accreditation standards,’ said Nic Millikan, managing director and head of investment strategy for alternative asset marketplace CAIS, which focuses on the independent wealth management space.
Asset management firms that turned up their noses at RIA clientele two or three years ago, Millikan said, have now changed their tone and are working to bring minimums down and create a bit more liquidity.
‘The theme that’s driving that is the fact that there are no more pension funds coming to market,’ he said. As a consequence of the widespread shift from defined-benefit plans to self-directed accounts, alts funds must shift toward RIA-managed funds and even retail investors themselves in order to maintain their relevance.
The marketplace market
Alternatives platforms today are still largely bifurcated. Some firms focus on brand-name funds with high minimums and rockstar managers, while others focus on smaller-scale, often riskier opportunities in more niche sectors.
On an institutional level, a leader has emerged in iCapital Network, which aims to bridge that divide. Founded in 2013, the New York firm’s platform today services some $105bn in assets – more than double what it had at the end of 2019 – across nearly 900 funds. It also provides the technology to automate reporting and distribution.
According to chief executive Lawrence Calcano (pictured below), iCapital endeavors to be an ‘end-to-end’ platform that provides access across the product and risk spectrum, from top rated hedge funds to direct startup deals.
‘People want to work with a platform that provides the full suite of products. When you look at iCapital, this is a big part of why we’ve been able to grow. It can fill a complete portfolio,’ Calcano told Citywire. ‘We’re trying to serve advisors wherever and however they choose to practice, whether that’s large banks, IBDs or RIAs.’
Partnerships provide another robust pipeline of new customers for iCapital, which has struck deals with Addepar and Envestnet to provide its products on their marketplaces. It also white-labels its technology to around 128 firms that offer iCapital products to their own clients.
‘Part of our strategy is to be the alternative plug-in to help power other marketplaces,’ Calcano said.
Competing with iCapital for a share of the RIA market is CAIS, which earlier this week raised $225m at a $1bn valuation in a funding round led by Franklin Templeton.
More differentiated firms include AngelList, which focuses on venture capital funds; Windmuehle Funds, which offers qualified purchasers access to more unique assets like income share agreements or California carbon allowances; and Proteus, which offers conservative, moderate and aggressive model portfolios comprising private equity, private debt, real assets and hedge funds.
Further downmarket are a litany of niche-focused startups like Vinovest, Masterworks and Alt, which have built online exchanges where investors can buy ownership in fine wine, art and trading cards, respectively. These companies generally market directly to investors and, with low or no minimums, are not exclusive to the ultra-rich.
Savant Wealth Management chief investment officer Phil Huber points out that these options aren’t mutually exclusive.
‘You don’t have to pick one. Different platforms can do different things better than others, so you might have a fund on one you like and a fund on another you like,’ Huber said.
Nuts and bolts
Alts marketplaces offer curated menus of funds spanning private equity, private debt, hedge funds, real estate – and other real assets – and even crypto. Advisors can pool together client money to shore up their buying power and get exposure to deals, funds and other assets that would otherwise be out of a client’s price range.
Institutional marketplaces like iCapital and CAIS offer advisors access to these funds at lower minimums than direct investors. They do this by aggregating individual purchase orders into feeder funds, which in turn invest in private equity or credit vehicles managed by institutional asset managers. Generally, a marketplace will then charge the investor a small ‘management fee’ on that feeder fund on top of the fees charged by asset managers for the products themselves.
However, not all marketplaces follow this model. Some seek to attract RIAs by advertising themselves as being free to advisors and end investors. CAIS, for example, charges fees only on the fund side.
Why would an asset manager pay a marketplace to distribute its products? Small or emerging managers aren’t all fundraising gurus, and sometimes simply want to diversify their base of limited partners. Reaching investors through RIAs can be an effective way to do that.
Huber expressed skepticism of ‘free’ marketplaces: ‘If they say it’s free, you’re the product.’
Marketplaces have made alts more available for some mass affluent investors, but the accessibility problem hasn’t been solved. Far from it.
From a regulatory standpoint, there remains a built-in barrier to access: accreditation. Even if an investor has the capital required to get into a fund and can get to it through a platform, they can’t invest without being properly credentialed, either as an ‘accredited investor’ or a ‘qualified purchaser.’ The Securities and Exchange Commission is working to loosen these restrictions, and in 2020 enabled people who have passed the Series 7 and Series 65 exams to qualify as accredited investors regardless of their net worth. RIAs and trade groups have pushed the SEC to broaden that qualification to include discretionary clients of fiduciary investment advisers, but to no avail.
‘We would love to see that expand,’ Millikan said.
While it has become easier to get exposure to most strategies and asset classes, iCapital’s Calcano said there is a gap in terms of what type of investor can get access to the biggest and best managers.
‘If you buy a product from Blackstone versus somebody else, you could have 1,000 basis points of difference in return. When we think about access, we think about access through the lens of expected outcomes,’ he said. ‘We spend a lot of time on the curation and diligence side trying to create opportunities for advisors to get their clients into funds that we believe have a strong probability of returning whatever the expected strategy returns are.’
Verdence’s Kelly lamented that RIAs with less than $100m in assets or those whose assets are concentrated among just a few huge clients, ‘have no buying power, they have no ability to access unique niche deals, no ability to get into high minimum deals and that access is a big challenge. So, their solution is, what, put that client in a giant fund of funds? They’ll pull multiple layers of fees and reduce your return.’
Some new market entrants tout solutions.
Verdence operates its own private equity marketplace called Independent Access Partners, giving clients exposure to a hand-selected list of niche deals as part of the services paid for by their AUM fee. Kelly (pictured below) said Verdence plans to soon begin licensing its platform out to other RIAs.
‘I think it’s incumbent upon larger RIAs like us to give the opportunity to access these kinds of vehicles to other RIAs who can’t do this,’ he said. ‘At the end of the day it’s about the client.’
Another upstart marketplace is Velvet, which connects advisors with smaller, riskier funds that provide potential for higher yields or exposure to niche sectors, like crypto. The firm advertises a private, white glove-style service where investors can speak directly with the manager of any fund on its platform. According to chief executive Andrew Pignanelli, Velvet is free for investors, charging asset managers between 2.5% and 4% on a on any capital raised through the platform.
‘iCapital … has blue chip funds that are very well known and pretty high performing. But they’re huge, you’ll never talk to the manager,’ Pignanelli said. ‘We go for the other side of the market. We go for the people trying to get exposure to private equity to enhance returns or make sure they’re getting exposure to niche sectors.’
Notably, Pignanelli and the other Velvet co-founders are young – Pignanelli himself is 20. By some accounts, the group, which founded a broker-dealer a few years ago, are the youngest owners of a broker-dealer ever. Like other alts marketplaces, Velvet brings a certain tech-startup energy to a realm of finance that has traditionally been based on decades-long relationships.
‘We’ve been able to come into the industry and look at it from a perspective that it hasn’t been looked from before,’ Pignanelli said.
Just 15 RIAs have signed up for Velvet’s platform so far, but Pignanelli said the firm is aiming to onboard as many as 150 advisory firms by the end of this year.
According to Huber (pictured below), alts marketplaces still struggle with cumbersome administrative processes.
‘As much as these platforms have aimed to make the allocation process more streamlined and digital, for advisors who aren’t accustomed to or comfortable dealing with capital calls and subscription documents, it’s just different. It’s a more complicated, involved process even with the benefit of technology.’
Calcano sees automation as a way to level that barrier.
‘The more automated the experience is, the better the experience is for all the advisors and clients. The more success we have in automating the industry, I think that enables the market to grow … and will make it easier for RIAs to adopt alts at scale,’ he said.
Also top of mind for product developers is how to more smoothly integrate with financial planning software and other advisor dashboards, including for reporting and distribution.
‘They do integrate, but its not as seamless as you’d like,’ Huber lamented, adding that it’d be nice to see firms develop portals for clients in addition to advisors.
‘There needs to be a cool front-end experience for clients as well, whether they’re already allocated to some of these funds or interested in looking through them, that’s been the piece no one has really hit on yet.’