Private markets
Private markets.jpg

Investment advisors in both the US and Europe have been expressing a desire to increase allocations to alternatives, but the average allocation has remained modest, according to gatekeeper and fund selecter surveys by Cerulli Associates and PGIM. “Alternatives are often too illiquid and too complex.”

Awareness of the astonishing growth of private markets is driving advisors to evaluate greater adoption, but allocations to alternative investments remain low among investment advisors. 

According to a recent study by Cerulli Associates, a Boston-based market intelligence provider, only 37.2 percent of American investment advisors currently use alternatives, with the asset class comprising a mere 2.3 percent of the average asset mix.

Illiquidity and complexity

Despite the apparent enthusiasm for alternatives, the projected increase in allocation over the next 24 months is expected to be minimal, rising by just 0.8 percentage points. This sluggish growth is attributed to several factors, with illiquidity and complexity being the primary concerns.

Daniil Shapiro, director at Cerulli, who analyzed hundreds of advisors across various wealth channels in the US, found that the lack of liquidity in many alternative investments is the most significant deterrent for advisors. In fact, this issue dampens enthusiasm for the asset class in 54 percent of cases.

Alternative investments, which can include assets such as private equity, real estate, and hedge funds, often come with longer lock-up periods and less frequent pricing than traditional stocks and bonds. This illiquidity poses challenges for advisors managing client portfolios, especially when market conditions change rapidly.

“The question is whether advisors buying semi-liquid products for their clients understand that they may be unable to sell the exposure when they want – and if their clients can cope with the illiquidity,” Shapiro told Investment Officer.

“Illiquid alternative investments tend to be more expensive for managers in a fee-sensitive environment. Advisors looking to implement alternative investments face hurdles due to challenging subscription processes and the need for education for themselves and their investors.”

Alternative assets typically involve more intricate structures, fee arrangements, and investment strategies compared to traditional mutual funds and ETFs, and therefore require greater due diligence to understand, Shapiro explains. The lack of standardized reporting and data quality issues in the alternatives space complicate that process.

Being an advisor allocating to this asset class “takes more work as it requires more research and a subscription process, while selling the products requires education for the advisor,” said Shapiro.

Although Investment managers traditionally are inclined to allocate most of their money to mutual funds, that vehicle seems likely to lose ground to ETFs, separate accounts, and alternatives in the coming years, according to Shapiro. All but the wealthiest advisors are at an early stage of adoption, he said. 

Europe

In Europe, 64 percent of fundselectors say their clients are underrepresented in strategies that invest in private markets. According to PGIM, more favorable fee structures, greater transparency, and better availability and accessibility are needed.

Matt Shafer, head of international distribution at PGIM Investments, expects the European demand for private market investments to increase significantly in the coming years – similar to the rise of emerging market investments around the turn of the millennium.

“Although it took time for investors to fully embrace emerging market equities and debt, it is hard to argue that a portfolio today is sufficiently diversified without exposure to the emerging world. In the coming years, private markets will be viewed in the same way.”
 

Author(s)
Categories
Access
Members
Article type
Article
FD Article
No