It’s no secret that asset managers are making a big push to capture the growing demand for alternative investments in the retail channel.
Big-name alternative asset players that have traditionally served institutions and high-net-worth investors, including KKR and Blackstone, have rolled out products that are steadily drawing fund flows. Specialized providers like Cliffwater LLC and BlueRock, which solely focus on semi-liquid vehicles designed for retail investors, have also made their mark.
But there’s another increasingly popular tactic of traditional asset managers forming partnerships or joint ventures with specialized alts managers to gain access. In these arrangements, traditional asset managers are tapping into the capabilities of specialist alternatives managers to build and manage products while offering up their established distribution pipelines to reach advisors and end investors.
That’s one of the findings in a new research report from Cerulli Associates, U.S. Alternative Investments 2024, which examines the overall state of alternative investments in the wealth channel.
“An important thing to remember is that traditional managers have a tremendous amount of wholesalers; they have tremendous distribution strength and reach into the retail channels that alternative managers maybe do not have,” said Daniil Shapiro, director of product development with Cerulli and one of the report’s authors. “It’s the strong relationships with financial advisors, the hefty distribution resources—that could be a strong plus in a partnership with an alternative investment firm.”
One example of this strategy is Franklin Templeton, which has acquired or partnered with a number of specialized investment managers, such as Clarion Partners, a private real estate investment manager, and Benefit Street Partners, an alternative credit manager, among many others.
Another recent example is Capital Group Companies, which in May formed a joint venture with KKR to develop new public/private hybrid products focused on credit, equity, infrastructure and real estate for mass affluent investors. The first products from the partnership are expected to debut in 2025.
According to Cerulli, such partnerships allow the firms involved to widen their reach. The firm found that 53% of the asset managers it surveyed currently rely on such partnerships, and another 50% plan to increase their reliance on them.
Overall, the report estimates that today, financial advisors own $1.4 trillion in semi-liquid assets. By the end of 2028, that figure might grow to $2.5 trillion. In addition, in 2023, asset managers surveyed by Cerulli said they sourced 13% of their alternative assets to the retail channel. They plan to increase that figure to 23% through 2026.
Many alternative asset managers continue to focus the bulk of their fundraising efforts on institutional investors, Shapiro said. At the same time, financial advisors still need substantial education on how to use and access alternative investment products and better-known brands to market these investments to their clients. Well-known alternative asset managers such as Blackstone, KKR or Carlyle, among others, might be highly appealing to retail investors considering investing in alternatives.
“These alternative managers maybe a lot of times resonate with clients as an exposure they don’t currently have access to,” Shapiro noted. “It’s certainly possible that you can use one of these partnerships in order to take a brand that an advisor trusts and combine it with a brand that an advisor really wants to access.”
Cerulli’s researchers found that while the use of alternatives by advisors has been growing, there are still some obstacles to widescale adoption. Low allocation to alternatives on the part of advisors’ home offices might be among the biggest ones, with 60% of asset managers identifying it as a challenge to delivery. Another 52% of asset managers noted the need for more advisor education on using alternatives. Lack of brand name when it came to alternatives distribution was cited by 42% of asset managers, and 39% cited insufficient distribution force.
Meanwhile, most advisors (55%) cited the limited liquidity of alternative products not being suitable for their clients as one of the significant challenges in allocating to alternatives. Another 45% said it was challenging to complete due diligence, given the complexity of alternative products. In addition, 37% of advisors pointed to fees on alternatives being too expensive and to subscription/redemption processes as challenges to their adoption.
Asset managers said that in conversations with advisors, they placed a high value on baseline education about a given asset class, with 77% of asset managers citing it. This was followed by guidance on portfolio construction (69%), education on how to discuss alternatives with clients (54%) and education on product structures (50%). Other topics that advisors valued more education on included how to access alternative investments (46%), guidance on market strategy (35%), deep dives into specific sub-sectors (27%), the impact of incorporating alternatives on the overall business (23%) and guidance on alternative investment fees (8%).
At the same time, only 21% of advisors Cerulli surveyed said they didn’t know enough about alternative investments. The firm’s researchers speculate that some may be overestimating their level of knowledge—“Nobody wants to necessarily admit they don’t know something,” according to Shapiro—although another segment of advisors might also be facing implementation challenges in adding alternatives to their portfolios.
Interval funds have emerged as the largest opportunity among semi-liquid alternatives for alternative asset managers to court retail investors. Cerulli found that 76% of asset managers identified it as a vehicle with a large distribution opportunity for alternative investment. Other sizeable distribution opportunities for alternative products in the retail channel include limited partnerships (according to 62% of asset managers) and non-traded BDCs (according to 61% of asset managers). Tender offer funds and master-feeder funds trail somewhat behind, with 44% and 38% of asset managers citing them, respectively.