Alts Adoption Accelerates as Models Drive Next Wave
The recent tumult of surging redemption requests at private credit non-traded BDCs has done nothing to dissuade enthusiasm for alternative investments in the wealth channel, based on the mood at the iCapital Connect conference in Phoenix this week.
In fact, while private credit is naturally a hot topic, asset managers and advisors are equally focused on what the next phase of alts adoption will look like, with many pointing to model portfolios and SMAs featuring alternative assets as key to continued adoption.
Overall, nearly 1,000 attendees from asset managers and 310 wealth management firms are attending iCapital’s second annual national conference.
“Private markets are at an inflection point,” iCapital CEO Lawrence Calcano said in his opening remarks. “There are new wrappers, new structures and new ways products are being brought to the market. That’s creating a lot of complexity. If you think about the last couple of years and where we are in the adoption cycle, thousands of new advisors have used alts. And that will speed up with tens of thousands more in the next couple of years.”
That’s despite the current uproar surrounding private credit. Some managers of semi-liquid private credit business development companies and interval funds have faced surges in redemption requests, exceeding monthly and quarterly caps (typically around 1% per month and 5% per quarter).
However, asset managers and advisors at the event contend that concerns about private credit fundamentals and managers’ ability to weather the storm are overblown. They also argue that the limited liquidity features are acting exactly as intended to protect asset managers and other investors. Most are also shifting away from using the term “semi-liquid” for the funds, in favor of “evergreen” or “perpetual.”
Instead, the tenor of discussions at the event remains optimistic about the continued adoption of private markets, including pointing to how the proliferation of model portfolios featuring alternatives and unified managed accounts equipped to handle private market investments will pave the way for continued growth.
Model portfolios offer a way to provide a single ticket, diversified alternative investment solution with asset allocation guided by a firm’s investment committee.
“Model portfolios are an important component in the adoption of alternative investments. They provide a holistic approach to incorporating alternatives centered on diversification across asset classes and fund managers. Model portfolios also allow for connecting alternative investments to the broader portfolio with less friction,” said Kunal Shah, managing director and head of private asset research and model portfolios at iCapital. “For those advisors who are still early in their journey with alternatives, model portfolios offer them simpler access to a range of underlying funds and enable them to build scalable exposure quickly.”
UMAs are another way to offer alternatives in a user-friendly, diversified way. They can also reduce friction by simplifying the subscription document process, according to several advisors at the conference.
Jon Diorio, managing director and head of product and platform at BlackRock, also talked about the growth of model portfolios, projecting that overall current assets in models (including traditional and alternative investments) could grow from their current volume of $4 trillion to $11 trillion by the end of the decade.
He pointed to the rise of models as being concurrent with the shift in wealth management firms from brokerages to advisory firms.
“Model portfolios have helped the industry,” Diorio said. “They’ve created a durable, thoughtful process around portfolio allocations.” Having clients invested in a portfolio also helps mitigate panic buying or selling, which in turn can lead investors to miss out on returns by mistiming markets. If clients understand they have a total portfolio allocation, they can weather volatility better. Incorporating alternatives into models will be the next evolution in that total portfolio approach.”