Christopher C. Williams | Bluerock
Alternatives providers and asset managers are leaning into a familiar business strategy to capture potentially $1 trillion in retail assets: They’re forming strategic partnerships.
That’s what Cerulli Associates concluded in its latest U.S. alternative investment report, which predicted that more players in the alternatives market will attempt to combine complementary platforms, technology and products.
“Strategic partnerships enable alternatives providers and asset managers to leverage each other’s strengths to reach new client segments that either firm may have been unable to serve on their own,” Daniil Shapiro, a director of product development at Cerulli, said in a statement.
In an interview, Shapiro said that these alliances are the next step in firms’ efforts over the years to access retail clients and to reach advisors slow to embrace alts investing.
“I’m optimistic managers will evaluate these kinds of opportunities” to form alliances, he said. “I believe it’s a rational approach to solving an important problem, which is how do you reach greater variety of investors who can only play smaller ticket sizes into a fund.”
Fifty-three percent of asset managers Cerulli surveyed rely on such partnerships, while 50% are planning to strike such alliances, according to the recent report. So, there is much room for growth.
The Boston research and consulting firm estimates that financial advisors own $1.4 trillion in less than fully liquid alternative investment assets and projects that amount will grow to $2.5 trillion by the end of 2028. The $1 trillion difference is a potential opportunity, the firm said.
Meanwhile, while only 13% of alternatives providers’ managed assets is sourced from the retail channel, that allocation could climb to 23% in the next three years, estimates Cerulli. The firm expects these partnerships to help boost this allocation.
Two notable alliances were struck in May that target investors below the ultra-high-net-worth/high-net-worth wealth tiers. Publicly traded investment firm KKR & Co. struck a strategic partnership with investment manager Capital Group to “bring new ways for investors to incorporate alternative investments into their portfolios,” according to a May 23 press release.
“Clients should think of this as ‘the best of both worlds’—a hybrid investment solution that combines Capital’s active management and long-term investment approach with KKR’s private market expertise,” Mike Gitlin, president and CEO of Capital Group, said in a statement.
In a second deal, Bluerock, a New York alts asset manager that has more than $18 billion in acquired and managed assets, agreed to take a minority interest in Townsend, a provider of global real estate and real asset investment advisory services, as part of a strategic partnership. Townsend is being bought by the Riverside Company, a private investment firm, and Bluerock, along with other institutional investors, are co-investors in the acquisition. Bluerock said the strategic alliance will expand Townsend’s distribution to the U.S. private wealth channel.
“We believe that our partnership with Townsend…will deepen our collective intellectual capital base and allow us to develop innovative new investment solutions that will serve the growing needs of retail investors,” Ramin Kamfar, Bluerock’s CEO, said in a statement in the release.
Emergence of Interval Funds
Partnerships are proliferating as the industry sees increased demand for multimanager products that make alternative assets more accessible to clients and mass-affluent investors, according to Cerulli.
Interval funds, for example, which allow investors to redeem shares if needed, held $75 billion in assets last year and posted a five-year compound annual rate of 22%, according to Cerulli.
“Investors are looking for simple-access solutions to alternatives where one ticket can get them access to the broader alternatives universe or access to multiple exposures within one alternatives sub-asset class,” Shapiro said in a statement. “Advisors using such products are likely to be helping their clients take initial steps of allocating to alternative investments.”
Jim Gold, CEO and a founding partner of Steward Partners, a New York City employee-owned RIA with $37 billion AUM, has seen a “noticeable” bump in client interest in alts over the years, but he noted that alts as a percentage of his firm’s revenue sits at a “very nominal” 5% or 6%.
Gold said that access to alts for a wider variety of investors has been boosted by “numerous, terrific” platforms created by technology and the breadth of alts offerings.
Beware Culture Clashes
In its report, Cerulli cautioned that the path to retail assets is potholed with challenges. Some of the risks to partnerships include culture clashes, overestimating partners’ distribution capabilities, and the hurdle of making offerings that resonate with advisors.
Indeed, for these strategic alliances to work, more advisors must embrace the asset class, the research firm said. The firm recently found that 51% of advisors surveyed don’t use alts, according to Brendan Powers, director of product development at Cerulli.
The research firm cited a lack of advisor understanding of alternative products and low allocations through home offices as key industry challenges. In addition, 55% of the advisors in a Cerulli survey said the lack of liquidity with alternative investments isn’t suitable for their clients.
Todd R. Walsh, CEO and chief technical analyst at Alpha Cubed Investments, an independent investment advisory firm in Irvine, Calif., said the illiquidity of the asset class is a key turnoff.
“We won’t do anything except plain, vanilla individual stocks and bonds where we can get our money back quickly when we need it,” the 38-year industry veteran said. “We typically avoid anything that doesn’t have daily liquidity.”
