The race is on to sell unlisted assets to wealthy private investors.
Leading custody bank BNY on Monday announced plans for a platform that will make it easier for financial advisers to buy and manage investments across a range of well-known private equity, private debt and infrastructure companies for their clients.
This follows three highly publicized partnerships between big traditional asset managers and well-known alternative investment firms targeting the wealthy in the retail market: BlackRock and Partners Group and State Street and Apollo were announced last week, while Capital Group and KKR struck a landmark deal in May.
They are all seeking access to fast-growing markets that can generate high fees, and also adapting to fundamental changes in the economy that have seen non-bank lending expand while more companies postpone or forgo public listings.
“A large part of the market is private for investors who want to own the entire market,” said Brian Moriarty, a strategist at Morningstar, a fund research firm.
So far, private market investors have overwhelmingly been pension funds, endowments and other institutions. While many have made big gains, they are beginning to limit or reduce their exposure to alternative investments.
According to data firm Cerulli, just 13% of alternative investment firms' assets came from private clients in 2023, but that share is expected to rise to 23% by 2026. By 2028, financial advisers are expected to manage $3.6 trillion in alternative investments for private clients, up 50% from $2.3 trillion last year.
Traditional asset managers and financial infrastructure companies want a piece of that pie — and they want to retain their existing customers as they expand into new markets — so they're partnering with alternatives to find solutions.
“This is what the market is asking us to do,” said Holly Flamstead, head of global product development at Capital Group. “We're looking to create a new space here and a new category for high-net-worth investors,” she said.
Analysts and investor groups have warned that big risks and challenges lie ahead. They worry about the impact of selling assets that are inherently illiquid and hard to value to retail investors who are accustomed to uniform disclosures and easy access to capital.
Not only are many products untested in volatile markets, but private funds' fees have historically been complex and much higher than traditional mutual funds or exchange-traded funds (ETFs).
“Investors need to understand that private markets don't have the same degree of transparency and the whole structure is different,” said Ben Shiffrin, director of securities policy at investor advocacy group Better Markets.
One of private markets' early success stories, Blackstone's wildly popular real estate fund Bright, raised tens of billions of dollars from individual investors before having to restrict withdrawals for months after redemption requests exceeded monthly limits.
A range of new ventures are experimenting with different ways to give private investors access to the higher returns that private assets can offer without sacrificing all of the liquidity and investor protections they expect from public securities.
BNY's platform, which will launch this fall and allow registered investment advisers and independent broker-dealers to buy, evaluate and manage alternative investments, has already signed up nearly 20 private markets professionals and divisions of major groups, including Carlyle, Blue Owl, Franklin Templeton, Invesco and Goldman Sachs.
“We want to be the gateway to the wealthy community and hopefully bring the same kind of methodology and rigor that you'd expect in the public markets to the private markets,” said Akash Shah, BNY's chief growth officer. The goal is to “give clients a real understanding of what they're being exposed to and how.”
State Street has applied to U.S. regulators for permission to sell an ETF that will hold both public and private bonds raised by Apollo. The structure would be innovative because ETFs can be traded daily, but some of the underlying assets can be hard to sell, analysts say. In the filing, the sponsors said Apollo has agreed to buy and sell the private bonds as it redeems the fund or needs to buy more shares.
“This could work, but it requires scale, liquidity and market depth, and no one knows if that will ever exist or if it will ever go away,” Morningstar's Moriarty said.
BlackRock and Partners Group made the proposal after Partners CEO Dave Layton attended Milken’s annual conference this spring and was alarmed by talk of private asset sales to individuals.They plan to offer investment packages called model portfolios to financial advisors, an approach that can be used to allow clients to diversify their money into adjustable alternative investments rather than putting it all in one fund.
“When product sales surge into popular categories, it often doesn't end well for clients. Our goal is to provide a more disciplined approach that they can look back on and be proud of,” said Mark Wiedman, head of BlackRock's global client business.
Analysts warn that the approach also comes with pitfalls. “Model portfolios are new territory, and managers will need to address the significant challenges of balancing underlying illiquid exposures and ensuring advisers understand the limitations,” said Daniil Shapiro, director of product development at Cerulli.
The Capital/KKR project includes launching a series of interval fund products in the first half of next year that would combine fixed income managed by Capital with private debt managed by KKR and offer the opportunity to sell periodically rather than in daily trading.
“Education is crucial,” says Eric Mogeloff, a partner at KKR. “It's really important that advisors and their investors fully understand the structure — how it works, how it can help investors, what the liquidity terms are, and of course the overall risks.”
