Alternative, but no longer exclusive

New US platforms are giving private investors access to a raft of alternative investments previously only available to the ultra-wealthy, by offering them in digestible $100,000 bites.

Summary: Backed by the banking behemoths, new US-based technology-driven start ups seeking to democratise hedge fund and alternative investing by offering more people smaller chunks of the pie, in return for a small fee. 

Key take-out: New US platforms are slicing up multi-million private equity investments into $100,000 portions - putting them within reach of less wealthy but alternative-hungry investors.

Key beneficiaries: General investors. Category: Investment Portfolio Construction.

Editor's note: As equity markets remain volatile, investors are often encouraged to consider how to diversify their portfolios. But it can be difficult for many SMSFs to access alternative investments such as private equity funds. Meanwhile, Australia's new Assistant Minister for Innovation Wyatt Roy this week called for a discussion around increasing super fund investment into start-ups.

This piece from Barron's provides an insight into how US platforms are offering a wider range of investors access to start-ups and other alternative strategies. A model for Australia, perhaps?

Families with a $US5 million portfolio can now diversify with hedge funds and alternative investments that were previously beyond reach, due to minimum investments of $US1m to $US10m. Technology-driven start ups are now chopping down those hefty commitments into $100,000 slices, and then efficiently making these more digestible bites available on a web-based platform. It costs nothing to sign up to access the investments, but the platform aggregators charge 0.5 per cent to 0.75 per cent annually on top of the 2 per cent and 20 per cent charged by the underlying managers.

That means the new services will pay off for investors only if they are genuinely getting access to stellar-performing alternative investments, not the dogs. Who’s behind all this? The start-ups building these platforms are CAIS, iCapital Network, and Artivest, but they are backed by gorillas like Credit Suisse, Goldman Sachs, Park Hill Group, Fidelity, and KKR.

Here’s how the services actually work: A wealth manager with a $US5m portfolio client, say, pre-qualifies his client’s suitability before sign-up, then sifts through a menu of funds, using a filter for performance or strategy. Lengthy due-diligence reports are also available on each of the funds. The advisor then puts the funds he likes into a virtual “shopping cart,” before the final click becomes the client’s buy-in.

The platform tracks the client’s fund performances, estimates the present value of either a specific fund investment or the overall portfolio, and even lists the dates of the fund’s scheduled capital calls. It’s a business targeting 11,473 registered independent advisory firms managing $66.7 trillion in assets. Registered Investment Advisor (RIA) firms, more than half of which have 10 or fewer employees, need product offerings that can help them compete against the big wire-houses, which generally have easier access to these funds.

Investors and managers both benefit

It’s a win-win for investors and fund managers, claims Lawrence Calcano, managing partner at iCapital. Alternative-investment managers grouse that big institutional commitments haven’t kept pace with the industry’s fund-raising needs, and the managers need access to large pools of wealthy private investors to keep growing. For investors, meanwhile, the lower minimums let them build a diversified portfolio when they have $US1m, say, earmarked for alternatives. “Calsters can write a $US500m check, but, by using technology, that $US500m can (also) come in slices as low as $US100,000 from thousands of investors,” says Calcano.

A high quality offering, so far

That’s nice, but it’s the quality of the funds that will ultimately determine the success of these new platforms. The start-ups insist they are offering a curated list of in-demand funds across an array of different investment strategies. “We don’t put funds onto the platform that people don’t want,” claims CAIS founder Matthew Brown. CAIS won’t offer an obscure Africa-focused fund, for example, but it does provide access to John Paulson’s Paulson & Co. and Dan Loeb’s Third Point. Independent industry observers confirm that, so far, the product offerings are of high quality.

CAIS has 40 to 50 hedge funds on its platform at any given time and periodically culls the laggards that have fallen below the firm’s performance and management expectations, established by Mercer, the platform’s outside consultant. Private equity, structured notes, and precious metals are also on tap, as are, at times, the latest-red-hot initial public offerings, proffered as slivers of the big banks’ syndicated offerings. We suggest checking the funds on Barron’s Penta’s Best 100 Hedge Funds list, as an extra layer of precaution.

Competitor iCapital is focused exclusively on private equity offering some 35 funds; Artivest offers both private equity and hedge funds. Investors are still subject to industry typical lockup periods up to 10 years, but that hasn’t dampened interest.

The new platforms are “especially attractive for smaller independent firms that don’t have the infrastructure in place” to offer these kinds of complicated alternative investments, says John Straus, CEO of FallLine Securities, which provides back-office support to independent financial advisors. No surprise: iCapital and CAIS already claim they are each servicing thousands of financial advisors on their platforms.

Up to 19 per cent in alternatives recommended

It’s a welcome development. Penta’s Top 40 private banks recommend that clients with $US5m in assets have as much as 19 per cent in alternatives at a time when one study suggests that 80 per cent of financial advisors aren’t even offering private equity to wealthy clients. These new platforms should help change that, but periodically ask pointed questions of your advisors to ensure that the dogs don’t sneak onto the platform and into your portfolio.


This piece has been reproduced with permission from Barron's.