Retail investors into Alternatives
Photo credit: The Motley Fool
The rush for individuals investing into alternatives is accelerating. As institutional investors such as pension funds and endowments, many over-allocated to private equity, have paused some of their alternative investing amid rising rates and economic uncertainty, the big alternatives firms such as KKR, BlackstoneBX, Apollo and Ares are intensifying their focus on retail distribution. And a special focus is on individual investors with assets of $1-5 million—this segment of US households has jumped nearly 60 percent, to 12.7 million, in the 15 years ending 2022, according to researcher CEG Insights. See the chart below.
US Households
Source: CEG Insights
Individuals with assets between $1 million and $5 million combined wealth stand at about $100 trillion globally, according to Bain. Yet this group dedicates only about 1 percent of their net worth to private equity and similar investments, reports Bain—so increasing that share even modestly could translate to tens of billions of dollars for cash-hungry alternatives firms. See the chart below.
One sticking point holding back the flood of individual money into alternatives is wealth managers not knowing how to incorporate alternatives into client portfolios. Cerulli Associates data reveals that only 2.3 percent of U.S. financial advisor assets were invested in illiquid alternatives in 2023. And a recent E&Y report, “When volatility causes complexity, how can wealth managers create opportunity?” further highlights that wealth managers also want to incorporate more diversified alternative offerings. Hence, we see the platforms being developed for education and handling of wealth managers inside the big alternatives firms, such as the KKR Academy or Blackstone University.
KKR, always a leader in alternative investing, has also led the industry in education for appropriate levels of individual investment in alternatives. In May 2022, they suggested some sophisticated wealthy investors, like family offices, allocate up to 30% of their portfolios to alternatives, based on research showing that such an allocation could dampen volatility and improve returns compared to the traditional 60/40 portfolio. Henry McVey wrote that “the private alternatives enhanced ‘40/30/30’ portfolio significantly reduced portfolio volatility while maintaining or improving returns in all environments.”
Building on that framework in their November 2023 report, “A New Foundation for Wealth”, KKR specifies how to actually create alternative portfolio allocations ranging from 10 percent to 30 percent, depending on an investor’s liquidity profile for their desired outcome.
KKR back-tested three different types of portfolios from most to least liquid—”generate income,” “preserve capital” and “boost return”— and published the results. The most liquid “generate income” allocates 15 percent of the portfolio to private credit, 7.5 percent to private infrastructure and another 7.5 percent to private real estate. The least liquid “boost return” allocates 15 percent to private equity and 5 percent each to private infrastructure, private real estate and private credit.
Individual investors and their advisors understanding how to better utilize well-formulated alternatives in their investment portfolios is a win for all. And a 10 percent initial allocation seems a reasonable target for many high net worth individual investors.
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