Retail Alternatives Drive $4 Trillion AUM Growth for Asset Managers - Episode Hero Image

Retail Alternatives Drive $4 Trillion AUM Growth for Asset Managers

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Original Title:

TL;DR

  • Increased access to alternative investments for retail investors could drive $4 trillion in AUM growth for alternative asset managers, enabling individuals to better meet retirement shortfalls with enhanced investment strategies.
  • Recent idiosyncratic failures like First Brands and Tricolor were primarily financed in liquid markets, not private credit, underscoring that direct lending offers a safer path to sub-investment grade yields than liquid markets.
  • Regulatory changes, particularly President Trump's executive order on 401(k)s and Biden's counter-order, have significantly opened the door for private markets to be integrated into retirement plans, creating a new market frontier.
  • Semi-liquid alternatives like non-traded BDCs and interval funds offer retail investors a way to access private markets, balancing liquidity needs with potential for attractive returns and income distributions.
  • The expansion of 506(c) exemptions, facilitated by the Breyer letter, allows alternative asset managers to more effectively market their funds, fostering brand building and broader investor engagement.
  • Credit and real estate are poised to be the strongest initial growth areas for retail alternatives due to their yield-oriented nature, while private equity and venture capital represent newer, potentially faster-growing frontiers.
  • Large, scaled alternative asset managers with strong credit franchises and established brands, like Blackstone and Blue Owl, are best positioned to capture this expanding retail market opportunity.

Deep Dive

The expansion of alternative investments into the retail and 401(k) markets presents a significant opportunity, estimated at $4 trillion in potential assets under management growth for alternative asset managers. This trend aims to help individuals bridge retirement savings shortfalls by offering access to potentially higher-yielding and less volatile investment strategies previously available primarily to institutions. However, this expansion also introduces complexities regarding investor education, product suitability, and the potential for increased fees.

The growing accessibility of alternative investments is driven by regulatory shifts, notably President Trump's executive order encouraging the inclusion of private markets in 401(k) plans, counteracting previous hesitations. This follows a history of evolving regulations since the Great Depression, which initially prioritized investor protection through registered securities. More recent changes, such as no-action letters on marketing rules, have further facilitated broader access. Products like non-traded Business Development Companies (BDCs), non-traded Real Estate Investment Trusts (REITs), and interval funds have become key vehicles for delivering semi-liquid alternative exposure to the private wealth channel, generally performing well and offering investors strong returns with downside protection. Incidental issues, such as the B-Reed redemption event, have largely been managed through existing liquidity mechanisms and contractual agreements, highlighting the importance of investors understanding the inherent illiquidity trade-off for potentially enhanced returns and reduced volatility.

The most natural fit for this influx of capital is expected to be in yield-oriented vehicles such as credit and real estate, particularly within target-date funds in 401(k) plans, and through non-traded BDCs and interval funds in the private wealth channel. Credit has seen the strongest growth due to its appeal for income-seeking investors nearing retirement, offering regular distributions that inherently de-risk investments. Infrastructure is also gaining traction. While private equity (PE) is emerging, its higher risk profile may appeal more to ultra-high-net-worth individuals. The success of these offerings hinges on managers' ability to educate advisors and investors about liquidity considerations and net-of-fee performance, as fees for alternative investments are inherently higher due to their more complex operational structure compared to liquid investments.

The winners in this evolving landscape will likely be large, scaled alternative asset managers such as Apollo, Blackstone, and Blue Owl, which possess the breadth of products, established brands, and sales forces necessary to capture this market. Specialized firms with complementary products or strong niche capabilities, like Oaktree in credit or specific direct lending specialists, will also find opportunities. Traditional asset managers partnering with alternative specialists may see varied success depending on incentive alignment and execution. Ultimately, individual investors stand to benefit from access to a more diversified range of investment options, potentially leading to improved retirement outcomes, though the increased complexity and cost structure necessitate careful consideration and robust investor education, primarily facilitated through financial advisors.

Action Items

  • Build educational materials: Define 3-5 core concepts of alternative investing for mass affluent investors, focusing on liquidity trade-offs and risk profiles.
  • Audit product structures: Evaluate 5-10 current semi-liquid alternative offerings for alignment with investor liquidity needs and regulatory requirements.
  • Track manager brand engagement: Monitor media mentions and public profile growth for 3-5 large alternative asset managers over a 6-month period.
  • Measure fee impact: Calculate net-of-fee performance for 3-5 alternative investment products against comparable liquid benchmarks over a 12-month period.
  • Design risk mitigation framework: Develop criteria for assessing the suitability of private market investments within 401k target date funds, considering cash flow predictability.

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Key Quotes

"Four trillion dollars is a pretty big number. It's the GDP of Japan actually, and it's also where Morgan Stanley analysts put the opportunity for the large alternative asset managers in terms of AUM growth over the next few years if the retail private wealth, however you want to define that channel, expands their holdings of alternatives to be anywhere close to where institutions are now."

Josh Clarkson explains that the potential growth in assets under management (AUM) for alternative asset managers is substantial, estimated at four trillion dollars, if the retail private wealth channel increases its allocation to alternatives to levels comparable to institutional investors. This highlights a significant opportunity for alternative asset managers to expand their client base and AUM.

"Taking a bit of a step back, it's important to bear in mind that individual investors have had access to many of these strategies, such as private credit, for quite a long time. Publicly listed BDCs have outperformed liquid benchmarks for since the financial crisis, and you've had private semi-liquid alternatives available in the private wealth channel for five or six years now at real scale, and that's gone generally pretty well."

Clarkson points out that alternative investment strategies, like private credit, are not entirely new to individual investors, with publicly traded vehicles and semi-liquid alternatives having been available for some time. This historical context suggests that the current expansion of access is building on existing frameworks and has generally been successful.

"The genesis of the United States securities regulation as we know it today was really in response to the Great Depression, and in the Great Depression and the run-up that preceded it in the '20s, you did have lots of these investment trusts that were leveraged investment vehicles investing in the hot stocks that performed very poorly. And so the SEC was very focused on regulating what types of co-mingled investment products could be brought to market for the retail market."

Clarkson provides historical context for securities regulation, explaining that current regulations were largely shaped by the failures of leveraged investment vehicles during the Great Depression. This historical perspective underscores the regulatory focus on protecting retail investors from risky investment products.

"The products you see today largely solved for that type of risk by having limited liquidity by maintaining liquidity sleeves in many cases so that they can be sure they always meet that liquidity. It's very important that investors understand that you are trading liquidity for lower downside risk, potentially better returns, and that is a trade-off you're making."

Clarkson emphasizes that modern alternative investment products are designed with liquidity considerations in mind, often incorporating liquidity sleeves to meet redemption requests. He stresses that investors must understand they are exchanging liquidity for potentially lower downside risk and better returns, a crucial trade-off in their investment strategy.

"The winners here though will not be evenly distributed across that 20 trillion. It will be the bigger scaled firms, the Blue Owls, the Areses, the Apollos, the Blackstones of the world, who have the breadth and scale to both offer top-tier products across a range of functions and build out those sales forces to really go after that opportunity in a really concerted way."

Clarkson predicts that the benefits of increased access to alternative investments will disproportionately favor larger, scaled firms with the resources to offer diverse products and build robust sales teams. He identifies major players like Blue Owl, Ares, Apollo, and Blackstone as being well-positioned to capture this growing market.

"Fees are going to be higher, full stop. These are more expensive businesses to run. If you compare direct lending to a liquid bond fund, in direct lending you need an army of originators going out there and covering the sponsors, covering the non-sponsored borrowers and finding you those direct deals. In a liquid credit fund, the bank does all that work for you and you just trade with the bank desk."

Clarkson explains that alternative investment products, particularly direct lending, will inherently have higher fees due to the increased operational costs involved in originating and structuring deals. He contrasts this with liquid bond funds, where banks handle much of the underlying work, leading to lower fees.

Resources

External Resources

Books

  • "The Intelligent Investor" by Benjamin Graham - Mentioned as a foundational text for understanding investment principles.

Articles & Papers

  • "The Breyer Letter" - Referenced as a no-action letter that leveled the playing field for verifying accredited investors under 506c exemptions.

People

  • Josh Clarkson - Managing Director at Prosek Partners, guest on the podcast discussing alternative investing.
  • Matt Reustle - Host of the Business Breakdowns podcast.
  • Howard Marks - Founder of Oaktree Capital, known for his memos and thought leadership in credit.

Organizations & Institutions

  • Prosek Partners - Mentioned as the employer of guest Josh Clarkson.
  • Colossus, LLC - The owner of the Business Breakdowns podcast.
  • The Podcast Consultant - Provided editing and post-production for the episode.
  • Morgan Stanley - Analysts mentioned for their projection of alternative asset manager AUM growth.
  • SEC (Securities and Exchange Commission) - Referenced in relation to historical regulation and a commissioner's speech.
  • First Brands - An auto port supplier mentioned as an example of a company with issues in the market.
  • Tricolor - A subprime auto lender mentioned as an example of a company with issues in the market.
  • Blackstone - Mentioned for rolling out B-Reed and B-Cred, and for their marketing efforts in the retail channel.
  • Oaktree Capital - Mentioned for its strong public brand anchored by Howard Marks and its partners at Brookfield.
  • Brookfield - Mentioned as partners with Oaktree Capital in building their business for the retail channel.
  • Kennedy Lewis - Mentioned as an example of a firm specializing in non-sponsored lending.
  • TPG - Mentioned for going public and quickly adding credit capability through Angelo Gordon.
  • Angelo Gordon - Acquired by TPG to add credit capability.
  • Blue Owl - Mentioned for its strong direct lending offering and subsequent additions to its credit offerings.
  • Apollo - Mentioned as a large scaled firm in the alternative asset management space.
  • Ares - Mentioned as a large scaled firm in the alternative asset management space.
  • P10 - Mentioned for its subsidiary TrueBridge, which provides access to VC funds of funds.
  • TrueBridge - A subsidiary of P10 that works with private wealth platforms to provide access to VC funds of funds.
  • Willow Wealth (formerly Yieldstreet) - Mentioned for its direct interaction with retail consumers and distribution of funds.
  • FINRA (Financial Industry Regulatory Authority) - Mentioned for its arbitration process regarding mis-selling of products.
  • Bain - Mentioned as a potential surveyor of investors regarding private markets firms.

Websites & Online Resources

  • portraitresearch.com - Website for Portrait Analytics, offering a free trial.
  • joincolossus.com/episodes - Website to find more episodes of Business Breakdowns.
  • thepodcastconsultant.com - Website for The Podcast Consultant.

Other Resources

  • Alternative Investing - The primary theme of the podcast episode.
  • Private Credit - Discussed as a key area of alternative investing with increasing access.
  • B-Reed - A non-traded REIT mentioned in the context of redemptions and liquidity management.
  • B-Cred - A non-traded BDC mentioned as a product rolled out by Blackstone.
  • Interval Funds - A type of registered fund that can invest in a broader range of assets than BDCs.
  • Non-Traded REITs - Mentioned as a product that became available to retail investors.
  • Non-Traded BDCs (Business Development Companies) - Mentioned as a product available in the private wealth channel.
  • Target Date Funds - Discussed as a potential vehicle for adding private markets exposure in 401k plans.
  • SMAs (Separately Managed Accounts) - Mentioned as a potential vehicle for private market exposure in 401k plans.
  • Collective Investment Trusts (CITs) - Mentioned as a potential vehicle for private market exposure in 401k plans.
  • Infrastructure - An asset class gaining momentum in the private wealth retail channel.
  • Real Estate - An asset class that was one of the first to gain traction in the private wealth channel.
  • Private Equity (PE) - Discussed as an emerging frontier for semi-liquid products for retail investors.
  • Venture Capital (VC) - Discussed as a different case than regular cash flow PE, with potential for higher risk.
  • Structured Notes - Mentioned as an alternative yield vehicle for mass affluent individuals.
  • Direct Lending - Discussed as a core strategy within credit, offering high current income.
  • Syndicated Loans - A more liquid class of credit that can be used for liquidity sleeves.
  • Structured Credit - Mentioned as a more liquid class of credit.
  • 506b and 506c Exemptions - Securities offering exemptions discussed in relation to marketing rules.
  • Accredited Investor Standard - The standard for qualifying investors in certain private offerings.
  • Qualified Purchaser Standard - A higher tier of wealth standard for investors.
  • ERISA (Employee Retirement Income Security Act) - Mentioned in relation to an executive order concerning private markets in 401k plans.
  • 401k Plans - Discussed as a potential channel for increased access to alternative investments.
  • DC Plans (Defined Contribution Plans) - Mentioned in relation to private markets in retirement accounts.
  • Liquidity Sleeves - Portions of funds designed to provide liquidity for redemptions.
  • Net Interest Margin - The profit from lending activities.
  • Alt Academy (Bowes) - An educational platform for advisors.
  • Apollo University - An educational platform for advisors.
  • BlackRock University - An educational platform for advisors.

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