Alternative Investments for Private Wealth Advisors

Panel perspectives into due diligence:

• Ben Goetsch, CFA, Senior Analyst Alternative Investments & Manager Research – City National Rochdale
• Aref Jessani, SVP Research & Due Diligence – iCapital
• Jonathan Lee, Director of Private Strategies – The Colony Group
• Moderator – Nic Millikan, CFA, CAIA, Director of Investment Strategy, CAIS

Panel perspectives into commercialization dynamics:

• Joan Solotar, Senior Managing Director, Head of Private Wealth Solutions – The Blackstone Group
• Ramona Heine, CFA, Co-Founder – Heine & Kim Fiduciary Partners LLC
• Dan Vene, FSA, Co-Founder & Managing Partner – iCapital
• Moderator – Rob Brown, PhD, CFA, Chief Investment Officer – Integrated Financial Partners

Here is some of what we heard from our speakers and panelists.

(1) Significant supply of product, and a misunderstanding of product rationale are some of the key challenges to sustainable adoption of Alternative Investments within Private Wealth.

Today new platforms, technologies, and asset managers are fueling an increasingly abundant set of Alternative Investment products, as the product structures develop further down market from fund-of-funds, feeders, through more recent interval funds offerings.

This has increased the potential for products that are mis-sold, overpriced, poorly designed, or that simply do not work – evaluation and selection ability is key.

In response, the industry has seen the rise of new intermediaries, alternatives facilitators – providing investment selection, due diligence, and scale administrative documentation and paperwork – critical today, and expected to increase in importance going forward.

A misperception often painted is that Alternative investment products are uncorrelated to traditional stocks and bonds. Commonly, this mischaracterization is attributable to stale or lagged pricing and reporting mechanisms for these types of products and investments.

A significant amount of education and training is required to level set advisor and client expectations on the rationale for Alternative Investments, potential risks such as liquidity (for certain products), other constraints such as lock-up periods or gate provisions, and the potential for Knockout (i.e. being forced out of one’s position due to external factors).

(2) Allocation to Alternative products is expected to increase.

There was general consensus among panelists and speakers that investor dollars will continue to migrate toward Alternative assets going forward, subject to products offering a solution to clients and producing required returns on a net basis.

Historically low interest rates – 1/3rd of worldwide sovereign debt currently carries negative yields to maturity – along with elevated valuations in public equity markets – a conundrum that is generating increased interest in alternative offerings with stable cash flows. The impact on fixed-income portfolios resulting from additional interest rate declines, in response to a potential recession, was also highlighted.

Several products providing true Alternative beta (low correlation to stocks, bonds, commodities) were noted. An information advantage when investing in private assets (vs liquid public markets), and an advantage of scale within private markets for large asset managers such as Blackstone was also highlighted.

(3) Education and expertise are critical.

A number of speakers spoke to investing time and resources into client education, noting the potential confusion for private wealth clients when investing in Alternative assets (e.g. getting charged fees for uncalled capital).

Blackstone highlighted its efforts to educate advisors through Blackstone University: examples of deals and structure, supplemented with case studies and other information online. iCapital highlighted its team of 25 field professionals focused on client education.

Other panelists noted the importance of full transparency to clients and also emphasized the lengthy diligence scrutiny, documentation, training and education runway for utilizing new products.

(4) Less is more.

During our due diligence panel discussion, there was generally consensus around the nation that less is more when it comes to alternatives products. Providing a shortlist of Alternative Investment solutions as opposed to offering a supermarket grocery store – to limit client confusion, education gaps, operational complexity – and in light of the significant due diligence, time, and expertise required for these products.

Product accessibility and systems integration was also highlighted – emphasizing efforts to make operational administration workflow of products streamlined in the areas of performance, data reporting, billing and documentation.

Blackstone also highlighted the benefits of using scale and broad resources harmoniously. As the world’s largest alternative asset manager, it has broken down internal silos to operate as a single global team with full transparency.

Many thanks to our event support volunteers: Yiwei Liu, Akash Kapur, Jonathan Dong, Viktoria Prignarina, William Line, and Brandon Pan.

And thanks, as always to the CFANY events staff: Mario, Vanessa, Tierney, Christopher & Amy.