Democratization of alternative investments – Are we there yet?

This blog is in continuation of my thoughts on alternative investments for retail investors with detailed information on customer segments, investment avenues and regulatory aspects.

The performance of alternative investments is better than their public market equivalents in long term. But the share of individual investors in private markets is only 6 percent as per McKinsey global private markets review 2024. With respect to the volume, at present individuals account for around $4 trillion out of $17 trillion in alternative assets under management, but the share of individuals is poised to expand to $12 trillion over the next decade as per Bain Capital global private markets report 2024.

Let us discuss how service providers offering alternative investments can enhance their solutions to capture this alternative investments market for individual investors.

Asset managers:

Creating alternative funds to individual investors is very different from creating alternative funds for institutional customers. Defining a product strategy aligned to the interests of different client segments is key for penetration in this segment. Individual investors’ exposure, liquidity, risk, tax and return expectations must be considered while offering alternative funds. Asset managers should also enhance their distribution capability by partnering with traditional asset managers and wealth managers.

The periodical disclosures through fund documents must be clear and concise for easier understanding by individual investors. Following ILPA standards for these reports across the industry will be helpful for investors to compare funds across categories and providers.

Wealth managers:

Incorporating alternatives into retail portfolios is one of the top priorities for wealth managers. Typically, wealth managers offer products and services of alternative investments to accredited investors, family offices and HNIs through arrangements with alternative asset managers or platforms offering alternative funds. They must deploy a digital platform internally for discovery, due diligence, investments and post trade services for retail investors. The portfolio performance and risk management modules should incorporate private investments along with public investments. The platform must adhere to specific local regulatory requirements, especially with respect to data strategy norms to store data within the geography.

Financial advisors:

Both regulators and wealth managers have lowered the minimum investment limits for individual investors. So, advisors who are selecting private assets must ensure that individual investor’s interest is matching with their risk profile, financial capability and knowledge about the risks associated and liquidity challenges with alternative investments. Digital platforms from wealth managers play a vital role in assisting financial advisors for comprehensive portfolio management for individuals combining alternative investments with traditional asset classes.

Fund Administrators:

One of the key challenges for fund administrators who service alternative funds, is to process non-standard financial reports received from portfolio companies for valuation and other purposes. Technology solutions are required to capture, process and store data from periodical financial statements and other reports from portfolio companies. Advances in automation technology, such as AI/ML, Natural Language Processing, can be used to smoothen the valuation process.

Platform providers:

Numerous technology solutions catering to B2B & B2C segments for various functions in the lifecycle of alternative investments are available in the market with niche and end-to-end solutions for asset managers, wealth managers and fund administrators. Firms must look for specific solutions to fit in their lifecycle management to increase efficiency and quicker go to market. Firms may use external consultants to evaluate, select and implement these platforms to handle private equity, private credit, real estate, infrastructure, natural resources, hedge funds and other alternatives as per their requirements. It’s essential to use these platform solutions to move from mostly manual processes to automated solutions for functions such as client management, investment research, due diligence reporting, portfolio management, performance reporting / investment dashboard, compliance / regulatory reporting, document management and educational resources.

Future forward:

Assets under management (AUM) in the private capital industry stand at $16.8 trillion as of December 2023 and are forecast to reach $29.2 trillion by 2029, according to Preqin's long-term industry forecasts. With the growing number of end-to-end platforms created for individual investors, the share of individuals will only increase to benefit from better returns in private markets. Service providers catering to individuals can excel by creating industry standards, adopting best practices and placing customers’ growth prospects before firm’s revenue targets.