Alternatives Providers, Traditional Asset Manager JVs Ramping Up
A growing trend among traditional asset managers is to establish partnerships or joint ventures with specialized alternative asset managers to obtain access. Traditional asset managers are utilizing the expertise of specialist alternatives managers to create and oversee products, while leveraging their existing distribution channels to reach advisors and end investors.
Cerulli Associates has released a new study on the retail and institutional alternative investment environment, which includes market sizing, investment approach, size, vehicle, distribution, and new product innovation.
The research and consulting firm estimates that U.S. financial advisors own $1.4 trillion in less-than-fully liquid alternative investment assets and projects, and plan to increase it to $2.5 trillion by the end of 2028. According to alternative providers, just 13% of their assets under management currently come from the retail channel. However, they anticipate that this percentage will increase to 23% during the next three years, noted The Cerulli Report—U.S. Alternative Investments 2024.
Alternatives providers and asset managers are increasingly aligning through strategic partnerships to take advantage of this “trillion-dollar opportunity,” with 53% of asset managers stating they now rely on such partnerships and 50% are planning to raise this reliance.
“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,” said Daniil Shapiro, director.
Franklin Templeton is one instance of this approach; among many others, it has acquired or teamed with several specialty investment managers including Benefit Street Partners, an alternative credit manager, and Clarion Partners, a private real estate investment manager.
As partnerships become more common, demand for and creation of multi-manager products has resurfaced, simplifying how all but the wealthiest investors gain access to alternate exposures. Cerulli’s research suggests that multimanager products are gaining popularity among investors who have a net worth below $20 million (ultra-high-net-worth) or $5 million (high-net-worth). These products provide a simplified way for advisors to enter the alternative investments market.
“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 (e.g., varying types of private credit). Advisors using such products are likely to be helping their clients take initial steps of allocating to alternative investments,” added Shapiro.
Although the utilization of alternatives by advisors has been increasing, there are still several barriers preventing widespread implementation. One of the major challenges identified by 60% of asset managers is the low allocation to alternatives by advisors’ home offices.
An additional 52% of asset managers expressed the requirement for further education on the utilization of alternative investments, while 42% of asset managers identified the absence of a well-known brand name as a key issue in the distribution of alternative products. Additionally, 39% highlighted the lack of an adequate distribution force as a significant concern.
Partnerships provide alternative providers with a valid opportunity to access retail assets. However, it is important to carefully assess the risks associated with partnerships, such as potential conflicts in culture, overestimating the distribution capabilities of partners, and ensuring that the brand and exposures align well with advisors. “Distribution synergies across channels should be vetted and the future product roadmap taken into account to ensure product market fit,” said Shapiro.
Interval funds have become the most promising opportunity among semi-liquid alternatives for alternative asset managers to attract retail investors. Cerulli discovered that 76% of asset managers regarded it as a vehicle with a significant distribution opportunity for alternative investment.
Asset managers have identified limited partnerships and non-traded BDCs as additional significant distribution opportunities for alternative products in the retail channel at 62% and 61%, respectively. Tender offer funds and master-feeder funds lag, with 44% and 38% of asset managers citing them, respectively.
