The firm ALTSMARK, which provides a solution for managing, reporting and risk analysis of private capital market portfolios, argues that the sheer scale of these markets means that wealth managers must build capabilities, and plan for how these assets are held in portfolios. In fact, the term "alternative" is arguably redundant.
More than a third of registered investment advisors could be put out of business within a decade if they don’t include alternative assets in their clients’ portfolios, according to ALTSMARK, a US software solution firm for the private capital sector.
“In our view, private capital markets will no longer be the exclusive dominion of large institutional buyers, but will include investors across the entire wealth spectrum,” the firm said in a report. Its study - The Private Capital Paradigm - ALTSMARK provides an end-to-end solution for managing, reporting and risk analysis of private capital market portfolios.
The report said that private market investments – such as private equity and credit – have exploded 30-fold from 2000 to $30.5 trillion today. Such assets, which tend to be less liquid than public market entities such as listed equities, have drawn investors attracted by their superior yields in a world of ultra-low interest rates.
A concern in the past has been the complexity of private market investments which are difficult to measure and report. Although some national regulators are changing, such assets are often considered off-limits for private retail investors, being the preserve of ultra-high net individuals ie those deemed “sophisticated investors” and professional players.
There are 414,791 global private market vehicles compared with 43,342 listed firms on major exchanges worldwide – a ratio of almost 10 to one. And yet the wealth management sector still needs to catch up and provide end-clients with the detailed data they need to track investments, ALTSMARK said.
In the US, ALTSMARK said that organizations such as RIAs cannot afford not to be involved in the alternatives space if they want to remain in business. It reckoned that up to 35 per of RIAs could go out of business if they haven’t planned for these investments.
Already, use of alternatives is growing in the US wealth space. Alternative assets are used by 57 per cent of wirehouses, 43 per cent of hybrid RIAs and 64 per cent of retail bank broker-dealers, ALTSMARK said. At the ultra-HNW end of the spectrum, such investors hold 46 per cent of all money in private markets. For the remaining 44 per cent, some 10 per cent of all holdings are in cash, 15 per cent in fixed income, 9 per cent in international stocks and 20 per cent in domestic US stocks.
One reason for the rising importance of private market assets is that the number of listed firms has declined. As a result, "achieving true diversification without an allocation to private markets is impossible,” the report said.
A report last November by Investors Business Daily noted that, at the time of going to press, the Wilshire 5000 index of investible stocks listed on US markets totaled just 3,530, falling 1 per cent from 2019. Over five years, that figure fell 7 per cent, and collapsed by half over 20 years. There are several forces at work, amongst which are the regulatory costs of being a listed business and the pressure of delivering quarterly results.
“There are several compelling reasons why investors are considering alternative investments. While the century is young, the stock market has already had three severe market declines creating considerable uncertainty, and the feeling that traditional investment options alone may not suffice,” the report said. “As our research shows, an ever increasing number of UHNW, HNW and now mass affluent investors are seeking alternative investments to find yield, higher returns, or as a haven against market volatility, or any combination of the above.”