Driving the Democratization of Alternatives
Many of the most exciting investment themes today are largely taking place in private markets and investors are eager to participate, says Kyle Kniffen, global head of alternatives, third-party wealth at Goldman Sachs
To what extent has a challenging institutional fundraising market accelerated the adoption of wealth or retail strategies among asset managers?
The fundraising environment has been challenging across all investor segments, driven by market fundamentals including the rate cycle and a lack of liquidity. Despite those challenges, interest in private markets from individuals continues to grow, and we expect to see more participation going forward as new solutions designed to cater to individuals’ needs are developed.
If anything, I would say the growth and democratization of private markets for individual investors is happening despite a challenging fundraising environment.
How would you describe the level of appetite you are seeing from the retail segment today, and what are the primary drivers?
The scope of private markets has broadened as companies have stayed private for longer and GPs have expanded their reach to fill financing needs. There are far fewer publicly listed companies than has historically been the case, which has driven appetite from the retail segment as individual investors look to access opportunities that can only be found in private markets.
Of course, strong and resilient returns are also a big part of the story. Many of the most compelling investment themes making headlines are unfolding within private markets, including breakthroughs in healthcare and technology. The digital and energy transitions that characterise the infrastructure opportunity set today are overwhelmingly weighted to private markets, while groundbreaking innovation continues to be dominated by private venture capitalists. All of this is providing a real draw for individual investors who want to be sure they don’t miss out.
Which of the asset classes within private markets is proving to be the most compatible with wealth capital?
Private credit is one of the many asset classes compatible with wealth capital. Individuals have consistently shown a disproportionate interest towards yield and its alternatives, leading to a surge in popularity for private credit, particularly direct lending, along with real estate lending strategies that offer a coupon. We also see growing interest in private equity and infrastructure, as the introduction of open-end and evergreen funds in these sectors enhances the accessibility to wealth investors.
Tax-advantaged alternatives is an interesting space, largely due to the prevalence of taxable accounts among individuals. We focus on a broad spectrum of clients including retirement funds and other tax-exempt accounts, but many individuals are taxable, which explains the focus on exchange funds and other public market long-/short-hedge fund strategies that have a tax advantage to them.
Individuals have a number of requirements that differ to the typical institutional investor. How are firms approaching the need to provide more frequent valuations and reporting, in particular?
One of the benefits of open-end funds for individual investors is not having to manage capital calls and distributions, with cashflow moving in and out on a frequent basis. Offering structures that eliminate that burden is key. Individual investors typically want to see lower minimum investment thresholds, which lowers the barrier to entry for different wealth segments and allows investors to build a portfolio in a measured way.
From a reporting and valuations perspective, open-end structures typically have more frequent valuation requirements, which puts a new obligation on asset managers to have in-depth and comprehensive valuation policies and procedures to share with investors. Additionally, open-end structures offer a simplified tax reporting process often using 1099s or simplified K-1s.
It all comes down to the standard of care that a GP provides in communicating what has gone into providing those valuations in detail. That does pose some challenges in the context of less-liquid assets, but we feel it’s essential if asset managers want to win the trust of these individuals.
In what other ways are managers seeking to differentiate themselves in front of this new audience, and how does this differ to the institutional setting?
Investors are increasingly focused on finding a wholistic partner with deep expertise across multiple asset classes, who can provide solutions and put together diversified portfolios to meet investor needs.
A complete partner also means the manager has experience across cycles, bringing wisdom to bear in their investment decision-making. This is particularly important for individual investors who may be investing in alternatives for the first time: they want to know the GP they are working with is experienced and reliable.
You also want to make your investors feel comfortable and educated in what they are investing in, ensuring you are working to provide your client base with insight, content and engagement. That is just as important as the investment discipline itself and having the right tools in place to guide investors through the investment process is incredibly important. We recently launched our Goldman Sachs Investment University, a dedicated educational platform designed to provide a range of global advisors with a single source of objective education for alternative investments and client portfolio implementation.
How is technology helping to support the democratization trend?
It is exciting to see what technology is bringing to the alternative investment space on many levels, from downloading fund materials to quickly learn about an opportunity, to platforms that allow you to generate an order and get qualified quicker than ever before.
There are platforms enabling e-signature on subscription documents. All of this takes a lot of uncertainty out of the process and allows you to spend more time thinking about your strategy and your portfolio.
Meanwhile, technology also has an important role to play post-investment. Technological advances are contributing to the ability to provide more frequent and granular reporting, enhancing the level of transparency for investors. Finally, and perhaps most importantly, technology platforms have broadened the reach of alternatives to a more diverse demographic and geographical audience, making the asset class more accessible and better understood.
Just how significant a role do you see individual investors playing in private markets in the long run, and what impact will this have on the industry overall?
We believe the role of individual investors in private markets will only become more prominent as time progresses. We can clearly see this in the proliferation of products being launched specifically with this group in mind.
It isn’t hard to see why asset managers are focusing their attention on this opportunity. Private wealth represents the largest and fastest-growing pool of capital globally, while also being the least exposed to alternatives today. We are still at the very beginning of this trend. There is a long way to go, but the direction of travel is undeniable.
