Corner Office Views | Q3 2023

Alternative Investments Distribution

Managers showing enthusiasm for a new guard of structures

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Sincerely,

Bing Waldert

Managing Director, U.S. Research

Key Points

  • 70% of managers believe there is a large distribution opportunity for interval funds and 56% each for non-traded REITs (NTRs) and non-traded business development companies (BDCs)—outpacing all other structures.

  • Half of managers polled by Cerulli already offer interval funds while a smaller portion offers NTRs and non-traded BDCs.

  • Cerulli urges firms not to underestimate the challenges they will face in distributing this wave of offerings: 69% of managers rating internal education and training as a major or moderate internal challenge, second only to the related challenges of distribution, including access to platforms and gatekeepers (77%).

  • As the largest traditional managers build out intermittent liquidity product, their competitive advantage can be bringing the offerings to the mass-wealth audience that already invests significant assets with them.

New distribution opportunities

The alternative investments industry is changing rapidly. Where it was previously synonymous with illiquid limited partnerships, master feeder funds, and somewhat watered-down liquid alternative mutual funds, managers are currently showing the greatest enthusiasm for a new guard of structures, with 70% perceiving a large distribution opportunity for interval funds and 56% each for non-traded REITs (NTRs) and non-traded business development companies (BDCs)—outpacing all other structures.

Half of managers polled by Cerulli already offer interval funds while a smaller portion offers NTRs and non-traded BDCs. The structures are receiving a tremendous amount of industry attention—including via traditional managers, some of whom have sizable distribution functions and are trusted by advisors. An interval fund sale may prove to be just a step beyond a mutual fund sale for scaled managers.

Distribution challenges

Alternative investment distribution will remain a critical priority for asset managers that perceive a revenue-generating opportunity (81% report this as a strong driver of offering alternative investments).

But Cerulli urges firms not to underestimate the challenges they will face in distributing this wave of offerings. Polling indicates that the learning curve for some will be significant. The challenges associated with educating advisors on the topic are well covered, with 69% of managers rating internal education and training as a major or moderate internal challenge, second only to the related challenges of distribution, including access to platforms and gatekeepers (77%). These challenges are being reported as firms are pushing wholesalers (and many have acquired distribution for such product) to sell—with some finding staff less prepared than expected—and with wholesalers finding a long road to a payout.

Managers also recognize that alternative investment demand from advisors is lukewarm. From their end-clients, it may well be cold. Less than one-quarter (23%) report demand from financial advisors’ clients as a reason for offering alternatives, underscoring that financial advisors will need tremendous education on discussing these exposures with their clients.

Platforms for high net worth

Despite the tremendous discussion of “democratization,” managers are heavily focused on distribution to the wealthiest clients, clearly prioritizing high-net-worth (HNW) initiatives above initiatives focused on the mass affluent. This is certainly sensible given the wealth that exists in these segments, but this is also not entirely revolutionary—HNW clients have long been able to access quality illiquid product—with the benefits of intermittent liquidity structures (versus being completely illiquid) being mixed at best given the tradeoffs of what can be packaged into them (less pure-play exposures that need to offer liquidity).

The most significant improvement for HNW clients is likely to be ease of access via platforms such as iCapital and CAIS that are continuing to improve their service offering to advisors. In June 2023, iCapital announced the launch of iCapital Marketplace, which centralizes offerings to registered investment advisors (RIAs) so that these advisors can now view and access a greater breadth of offerings. As these platforms focus not only on product access (and increasingly so on a wider shelf of product including structured notes and intermittent liquidity) but also education and due diligence, they certainly play a critical role in continued advisor uptake. While firms will generally still need their own distribution resources, the importance of such platforms is difficult to understate.

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The most significant improvement for HNW clients is likely to be ease of access via platforms such as iCapital and CAIS that are continuing to improve their service offering to advisors.

- John

Mass wealth and DC opportunities

Cerulli believes that many firms will have to go further downmarket to truly deliver on the value proposition of offering greater access to investors—and many traditional managers will be well placed to do so given their trusted brands, large salesforces, strong relationships with home offices, and in some cases captive distribution. As the largest traditional managers (e.g., BlackRock, Fidelity, Franklin, Invesco) build out intermittent liquidity product, their competitive advantage can be bringing the offerings to the mass-wealth audience that already invests significant assets with them. Eventually, it wouldn’t be shocking so see the firms with their own direct platforms and strong technology make sales to end-investors.

Expectations for the distribution of alternative investment product to the defined contribution (DC) channel remains low to modest despite a hefty portion of firms already offering some type of exposure, typically via target-date funds. Key challenges include a lack of demand from plan sponsors that are not enthusiastic about including more expensive products and worries about potential legal risks.

Authored by

Daniil Shapiro, CFA

Daniil Shapiro, CFA

Director

Bio →

Daniil Shapiro, CFA

Daniil Shapiro, CFA

Director

Daniil is part of Cerulli’s Product Development practice, where he works on the identification, analysis, and reporting of asset management industry trends with a focus on exchange-traded funds (ETFs) and alternative investments.

Prior to joining Cerulli Associates, Daniil was part of the Product Management and Business Intelligence teams with the MainStay Funds, part of New York Life Investment Management. At MainStay, Daniil supported sales efforts via fund and ETF competitive analysis, product research, and development of marketing materials, as well as performance reporting. Before New York Life, Daniil was part of the risk management practice at Accenture, and held risk and compliance roles at HSBC’s investment bank.

Full biography here.

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