iCapital Network research shows experienced advisers bullish on alternatives
A new report from iCapital Network has revealed a bullish attitude amongst senior advisors towards alternative investments for the coming year.
Currently, 34 per cent of those advisors surveyed about their appetite and future plans for alternative investments have at least five per cent of client assets in private equity funds and 27 per cent have at least five per cent of client assets in hedge funds.
Over the coming year, the majority plan to maintain or increase exposures to private equity funds (87 per cent), hedge funds (61 per cent) and private direct deals (93 per cent), motivated mostly by potential investment returns and diversification goals.
"This research shows that advisors recognise the potential benefits of investing in alternative asset classes," says Lawrence Calcano (pictured), chief executive officer of iCapital Network. "However, the ability to access high-quality alternative investments has historically varied widely based on the business model of an advisor, a finding evidenced in this research. Our goal is to more broadly democratise alternative strategies and exposures for all high-net-worth advisors."
Private equity funds are the most commonly used alternative investment with 77 per cent of surveyed advisors allocating to it in client portfolios.
While 66 per cent of advisors have less than five per cent of client assets in private equity funds, this is primarily driven by RIAs and IBDs, with over 70 per cent of each cohort allocating at this relatively low level compared to just 38 per cent of wirehouse advisors. Notably, nearly half (48 per cent) of wirehouse advisors allocate between five per cent to 10 per cent whereas less than one fifth (19 per cent) of each IBDs and RIAs allocate between five per cent to 10 per cent of their clients' portfolios to private equity. Eleven per cent of wirehouse advisors are allocating between 10 per cent to 15 per cent to private equity funds.
The large majority (89 per cent) of advisors surveyed cite attractive returns as the most compelling reason to invest in private equity funds. An outsized number of RIAs (78 per cent) also point to diversification and the unique nature of the investment opportunities as reasons to invest, compared to their peers at wirehouses and IBDs, which may be related to the historically limited access to PE funds within the independent channel.
Most advisors point to finding more appropriate clients (86 per cent), high minimums (61 per cent) and illiquidity (53 per cent) as obstacles to greater investment in PE funds, with independent advisors at IBD firms (54 per cent) and RIAs (49 per cent) also citing ease of access.
The majority of advisors plan to stay invested in private equity, with 54 per cent of advisors planning to invest the same over the coming 12 months, 32 per cent planning to invest more and 13 per cent planning to invest less.
"The majority of advisors we surveyed have incorporated private equity into client portfolios due to its performance in relation to public markets over longer-term periods. The characteristics of the asset class increasingly appeal to advisors who recognise the potential to promote a buy-and-hold discipline and to seek enhanced client returns amidst challenging market dynamics," says Nick Veronis, co-founder and managing partner at iCapital Network.
Average allocations to hedge funds are lower than to private equity funds among surveyed advisors, but similarly, higher returns and diversification are cited as the primary motivations for seeking out hedge fund investments.
Seventy-three per cent of advisors invest less than five per cent of their assets to hedge funds and 22 per cent allocate between five to 10 per cent. Wirehouses are more bullish on hedge funds than their independent peers, with 67 per cent planning to maintain or increase investments, yet most (54 per cent) advisors plan to at least maintain their hedge fund exposure. Like private equity, investment returns are the most popular reason for advisors seeking out HF investments. The second-most-cited reason by 60 per cent of advisors is diversification.
Wirehouse advisors are less likely to cite ease of access and illiquidity as issues impacting their ability to invest in hedge funds, pointing to the differences in business model characteristics like net worth and infrastructure between advisor models.
In accessing hedge funds, IBDs and wirehouses function more similarly than RIAs. Eighty-three per cent of RIA respondents gain access to hedge funds directly from GPs, although 14 per cent also employ feeder funds to facilitate access. Notably, the RIAs surveyed completely steer clear of hedge fund-of-funds, consistent with the overall trend in industry assets under management over the past few years. Advisors at wirehouses and IBDs continue to use both feeders and fund-of-funds, perhaps due to legacy programs in place at their home offices.
"Hedge funds can employ a wide array of trades and strategies to take advantage of changes in the economic and geopolitical landscapes. It's critical that advisors have access to comprehensive education and due diligence when determining how hedge funds may fit into client portfolios," says Eileen Duff, managing partner and head of independent wealth solutions at iCapital Network.
Advisors are interested in private direct investments for the returns they can offer (88 per cent), but also believe that these are "unique opportunities" (57 per cent) more so than investments offering diversification, which differs notably from private equity and hedge fund investments. Wirehouse advisors are most likely of all advisor types surveyed to invest in private direct investments for their diversification benefits.
The average check size into private direct investments ranges from under USD1 million at RIAs to between USD1 million and USD5 million from wirehouse and IBD advisors. Across advisors, 45 per cent allocate less than USD1 million, 42 per cent allocate between USD1 million and USD5 million, and just over four per cent typically invest over USD10 million per deal. However, notably, almost a fifth (18 per cent) of wirehouse advisors typically invest over USD10 million per deal.
Advisors rely primarily on their networks (58 per cent), family and friends (42 per cent) and angel groups (21 per cent) to source direct deal flow. Second to finding more appropriate clients (cited by 81 per cent), limited deal flow (73 per cent) is a major issue impacting the ability to invest in direct deals for all advisors.
The majority of advisors surveyed plan to either increase their allocations to direct investments (45 per cent) or invest the same amount (48 per cent) over the next 12 months. RIAs have the strongest interest in increasing exposure going forward (56 per cent), which could present an opportunity for aggregation platforms offering high-quality deals and due diligence to these advisors.
"Despite the shortage of high-quality deals that are available to them, advisors have expressed more enthusiasm about private direct deals than other alternative asset types. Advisors and their clients will continue to look to their personal and professional networks to source unique investment opportunities," says Hannah Shaw Grove, managing director and chief marketing officer at iCapital Network.
Finding more appropriate clients is cited by all advisor types as the most important issue impacting their ability to invest in alternatives. Illiquidity and high minimums are also consistently highlighted as obstacles, suggesting that advisors need wealthier clients with the risk tolerance and diversification goals appropriate for these investments.
"Technology, new product structures and education are removing many of the barriers associated with investing in alternatives, but certain characteristics inherent to alternative investments that drive performance, like longer investing timeframes, will remain. This places a greater emphasis on portfolio construction expertise for advisors seeking to reap the return and diversification benefits of alternatives," says Tom Fortin, managing partner and chief operating officer at iCapital Network.