GSAM: What’s next for the democratization of alternatives?

22 februari 2024

Education and careful manager selection will be crucial for private wealth investors considering alternative investments in 2024, say Goldman Sachs Asset Management’s Adam Lane, Barry Fricke and Hilary Lopez.

What will be the biggest developments within the democratisation of alternatives in 2024?

Adam Lane: 'I believe we will continue to see increased demand for the democratisation of private market investments from financial advisers and their clients. In addition, alternative asset managers will continue to expand their focus on the private wealth channel. In my view, 2024 will continue to be a macro environment of historically high interest rates, higher inflation and lower GDP growth. This may lead to concerns that a 60/40 portfolio will not help clients achieve their long-term investment objectives.

We will also see an expansion in the drivers behind why advisers are considering alternatives for their clients. Advisers and their clients will look across a broader range of objectives, including return enhancement, inflation protection, diversification and volatility management, for adding private markets to portfolios. We believe alternatives are playing a growing role in portfolios and across a wider array of investment types.'

Barry Fricke: 'With this increased adviser demand, investment managers are responding accordingly. They continue to refine their investment offerings – launching new vehicles, broadening their products and refining their fee/liquidity structures – in an effort to expand the accessibility of these investments. It has been exciting to see this and be part of the product innovation within alternatives over the past few years.

We have also seen the level of servicing in support of advisers increase during 2023, with more organisations expanding their dedicated teams of specialists to assist advisers with their alternatives allocations. Like other firms, we are focused on enhancing our educational offerings.'

What are some of the key risks that less experienced investors need to know about when it comes to private markets?

Adam Lane: 'There are three key areas that I think are important for investors to consider before investing in private markets; understanding the details of investing in alternatives is important given their inherent risks and characteristics. First, investors should understand that certain private market investments and vehicles are illiquid and should be considered longer-term strategies. Second, transparency is a key consideration, as alternative investments may not offer the same level of transparency of holdings as traditional equity and fixed-income funds. Finally, alternatives are actively managed investments, and returns can vary greatly by strategy and manager. Manager selection is especially important in the private markets. I believe the dispersion of manager performance will only get wider as more asset managers enter the space.'

How can market participants help educate individual investors on the nuances of private markets?

Adam Lane: 'It is important for advisers and their clients to understand the risks and characteristics of different types of alternative investments and the key features of various vehicle structures. For example, a traditional drawdown fund may have different fee, liquidity, tax reporting and investment minimums than funds that offer quarterly redemption provisions. Additionally, differences can be found across asset classes and their ability to help investors achieve their objectives.

Investors with objectives focused on inflation protection or income, for example, may benefit from a higher allocation to private credit and real assets versus other alternative asset classes. Partnering with a provider with a history of managing alternative investments can be helpful in gaining these insights across asset classes and vehicles.

We have been managing private market funds for over three decades and have experience building portfolios across alternatives. We are focused on providing advisers with the knowledge they need to navigate always-evolving alternatives markets. We believe investors should thoroughly research and understand these investments before making any decisions.'

Some regulatory changes are helping to speed up the democratisation of alternatives. What developments are happening in Europe?

Barry Fricke: 'There continues to be an evolution of the European Long-Term Investment Fund (ELTIF) regulation, and this year I believe we will see further expansion in the number of registered products.

The regulation initially helped open the door for Markets in Financial Instruments Directive (MiFID) retail end-investors to access private market investment opportunities, and the revised ELTIF 2.0 regulation introduced this year may further improve accessibility for these investors, subject to distributors’ suitability assessments.'

Hilary Lopez: 'We also see investors taking more of an interest in these structures, for several reasons: the ELTIF structure may enable more flexible investment terms, lower minimums and increasingly competitive fees compared to other alternative investment offerings.'

How should clients think about allocating funds toward alternative investments?

Adam Lane: 'It’s always hard to make a general statement because it really depends on an individual’s risk profile, risk tolerance and the amount of liquidity that they need. But a financial adviser with a good understanding of their clients’ needs and the key characteristics of each alternative strategy or asset class can help with decisions on how much to invest in the asset class.

Investors should tailor private asset implementation based on portfolio goals and objectives. We offer analytical tools to help provide product-agnostic portfolio construction advice. Once the asset allocation is determined, it is important to think through the appropriate investment vehicles since there is such a broad range available today, including interval funds, non-traded, closed-end funds, and private placements. Depending on the fund structure, liquidity can be limited, so aligning time horizons with the appropriate fund structure is important.

Also, some investors may benefit from a multi-manager approach, as this can provide them with broader potential diversification. The final step is manager selection, which is crucial given the dispersion in top- and bottom-quartile-performing managers.'

What should individuals be looking for when selecting a fund manager?

Hilary Lopez: 'The strength of the investment team, track record, liquidity and risk management framework are all key elements of the evaluation process. Investors should also be aware of the reporting cycles and transparency provided by managers and understand what they are investing in when allocating to alternatives. We believe incorporating alternatives into a portfolio can bring numerous benefits, but these investments can carry their own risks and complexities. We are focused on delivering education, strategies and support to meet our wealth management clients’ expectations.'