Wealth managers understand the value of diversification and a long-term investment strategy. However, if you solely recommend public equity and bond investments, you risk falling short of your clients’ expectations. Despite the new investment environment, in which equity markets have been on a strong bull-run for the past five months, advisors are staying with alternative assets. 

Asset managers are increasingly introducing new investment vehicles targeting the wealth channel, including spot bitcoin ETFs, infrastructure interval funds, and private credit and private equity strategies.   

Connect Money asked Andrew Krei, co-CIO of Barret Upton Capital Partners and Crescent Grove Advisors, why RIAs are focusing on alternative assets, which sectors make the most sense in the current market environment, and which sectors he is most bullish on over the next several years. 

Q: Why are more RIAs looking for alternatives? 

A: Alternatives continue to gain popularity with RIAs for many reasons. A simple one is that alts have become more accessible in recent years. As asset managers and distribution platforms have pushed to create products that cater to the private wealth channel, there has been an emphasis on providing educational content to advisors and clients, and efforts to streamline the operational complexities associated with alternatives have come to fruition. 

Fundamentally, alternatives remain an area of emphasis as RIAs look for ways to generate higher returns, manage volatility, and diversify client portfolios. A year like 2022—where most traditional asset classes struggled—was a reminder of the benefits of including alternative assets in portfolios. Going forward, investors see private markets as a compelling way to play big themes like artificial intelligence, the ongoing shift from bank lending to private lending, and dislocations in commercial real estate. 

Q: Which alternative investments do RIAs prefer in the current macroeconomic environment? 

A: Private credit has seen large inflows in recent years and continues to be a very well-supported segment within the alternative landscape. RIAs are always in search of ways to generate higher yields for clients, and the current environment is no exception. Stress in traditional bank lending channels has also provided opportunities for private lenders to expand their reach and deploy greater amounts of capital at favorable terms. 

Q: What alternative assets are you most optimistic about over the next two to five years? 

A: We are most excited about the opportunities in private equity and private real estate over the coming years. Within private equity, market dislocations and difficult fundraising environments have historically coincided with some of the best vintages for the asset class.  

The higher interest rate backdrop helped reset frothy valuations coming out of 2021, and sluggish capital formation in 2022-2023 should put investors with dry powder in a position to be more selective as companies look to raise capital. 

Within private real estate, a looming wall of debt maturities in 2025-2026 should catalyze a wave of transaction activity over the coming quarters and force the “bid/ask spread” to close – i.e., the gap between what buyers have been willing to pay and what sellers have been willing to accept.  

The market has experienced a meaningful reset as the Fed’s rate hiking cycle ushered in a higher cost of capital environment. This has left many asset owners in the difficult position of either refinancing debt at elevated rates or cutting bait on properties at valuations far below the cycle peaks in 2021. But for well-capitalized buyers, this dynamic creates opportunities to acquire assets at favorable terms. 

Q: What are your limits on concentration when using alternatives? 

A: We think about concentration limits in different ways. At the aggregate portfolio level, we want to avoid an overconcentration in illiquid assets relative to future liquidity needs. Finding the appropriate level of private market exposure starts with understanding a client’s cash flow dynamics but also requires a thoughtful evaluation of anticipated capital calls and distributions to understand the evolution of a client’s liquidity over time. 

As we construct an alternative investment program, we address concentration limits in terms of asset class, sponsor, and vintage year exposures. We think about basic principles of diversification—like avoiding too much exposure to any single market segment or manager—while also considering how our pace of commitments will spread deployments and realizations over different parts of the market cycle. 

Q: What liquid or illiquid alternatives are regularly adopted by your clients?  

A: We use a variety of alternative strategies and group them into four categories: private equity, private credit, private real estate, and absolute return hedge funds. Within each of those categories, we look for managers with repeatable and sustainable competitive advantages that are often a function of their position within a target market segment, sourcing capabilities, operational acumen, and/or analytical expertise. Our allocations are tailored to each client’s mandate, focusing on asset classes that align with specific return and risk objectives.