What Will It Take to Actually Get Alts in More Portfolios?

It’s the first rule of finance: Don’t invest in what you don’t understand.

While access to alternative assets is expected to broaden under the Trump administration’s Securities and Exchange Commission, led by Paul Atkins, mass affluent clients, and even advisors, aren’t overly familiar with the investments, including venture capital, infrastructure or real estate deals. The key to greater alt acceptance may lie in introducing them through more traditional products, like certain kinds of mutual funds and ETFs.

“If you’re going to introduce a new asset class to the market, people will need time to become comfortable,” said Eric Pan, CEO of the Investment Company Institute. “I’m not advocating for direct sales of private assets to retail, but using [40 Act] funds.”

Old Products, New Tricks

One way to introduce alts to retail investors or mass affluent clients is through target-date funds, Pan told Advisor Upside at a Financial Times conference in New York City this week. Such funds automatically adjust asset allocations over time and are already popular in 401(k)s. While alternatives often carry higher costs and potential risk, the biggest hurdle for retail investors is illiquidity, Pan said. “If it’s a piece of infrastructure, it may take you 20 years to build a bridge,” he said. “If it’s real estate, you can’t sell that overnight.” He suggested closed-end funds, which are less liquid by design, as another solution.

Some firms are already using these vehicles to reach retail investors:

• KKR and Capital Group launched two private credit interval funds — a type of closed-end fund — earlier this year. 
• Meanwhile, State Street and Apollo launched a series of target-date funds with exposure to private credit, private equity and real assets.

Another big piece of the equation is transparency. If firms want to attract more clients to alternatives, private market products are going to have to become more transparent. “That’s a requirement to unlock everything else,” BlackRock COO Rob Goldstein said during a panel discussion at the conference. “The more transparency you provide on private markets, I actually think you’ll see an increase in allocation of capital to the private market.”

Not So Fast. Some industry leaders remain skeptical, though. While PIMCO has launched private credit funds geared toward wealthy retail investors, company CEO Emmanuel Roman said the firm is “paranoid” about illiquidity risks, and that investors need to be compensated for locking up their investments long term. “You really have a burden of proof in terms of having a product, which delivers double-digit returns and offers what it says on the box in terms of liquidity,” he said during the conference. “It’s hard to make liquidity out of nowhere.”