In episode 16 of our Alternative Allocations podcast series, I had the opportunity to sit down with Nick Veronis, Co-Founder and a Managing Partner of iCapital Network. Nick and I discussed a wide range of topics, from product evolution to advisor adoption and the shrinking universe of public companies. We began our journey by revisiting the founding of iCapital and the challenges for advisors at that time. We explored how the industry has evolved to meet those challenges.
A decade ago, the wealth-management community struggled with paperwork and technology to open and process accounts. There was limited access to the private capital markets, no institutional-quality due-diligence reporting, and not a lot of research available to wealth advisors. Advisors often lacked sufficient knowledge about the asset class, the products available to them and how to use these tools appropriately.
Now, we are seeing a robust lineup of institutional managers offering products to a broader group of investors, in a more flexible structure, with lower minimums. Firms like Franklin Templeton, CAIA, iCapital and others have built comprehensive training programs and thought leadership to help advisors, and the technology and online processing of paperwork has improved dramatically over the last decade.
Nick and I discussed product evolution as a key lever for advisor adoption. The first generation of funds were limited to the roughly two million qualified purchaser (QP) households in the United States, possessing high minimums and limited liquidity. Feeder funds were introduced to bring the minimum investment down to US$100,000 and streamline the processing of capital calls, distributions and K-1s. These were still only available to QPs.
Registered funds, including interval and tender offer funds, are available to the roughly 14 million accredited investor households. Minimum investment requirements for these range from US$2,500 to $25,000. They also eliminate the complexities of closed-end drawdown funds, and they offer quarterly liquidity (typically restricted to 5% per quarter) and simplified 1099 tax reporting. These funds are often called “perpetual” or “evergreen,” describing their availability. Note, there are structural tradeoffs associated with the various vehicles (Exhibit 1).
Exhibit 1: Structural Tradeoffs
Registered funds have helped democratize the access to alternative investments by expanding the number of investors who can use these unique investments. As the Cerulli data in Exhibit 2 illustrates, the number of households that meet the QP threshold (US$5 million or more in investable assets) is fairly limited, while registered funds are available for accredited investors (US$1 million or more in investable assets) and others below that threshold.
Exhibit 2: Wealth-Tier Demographics
Nick noted that the game really changed when top-tier firms decided to launch evergreen products in the wealth channel, “… taking greater ownership of these products, eliminating the intermediaries, bringing institutional style pricing to the marketplace.” He added that “… by the way, they’re doing that because they want to deliver strong results. They want to protect the integrity of their brands.”
Nick and I discussed the growing need for more robust and comprehensive training around the use of alternatives. He noted that basic training is essential—but emphasized that advisors need to understand liquidity constraints, fees, structural tradeoffs, asset allocation and portfolio construction.
We agreed this is a journey where the industry needs to meet advisors wherever they are on their path toward alternatives. We need to offer education through different means, including online and in person. We need to provide objective and transparent advice, focusing on helping investors achieve their long-term goals.
Nick reminded about how far we have come as an industry—and also how much work still needs to get done.
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*The podcast was honored by the 2024 WealthManagement.com Industry Awards in the thought leadership category, which recognized its outstanding contributions moving the industry forward by providing insights to advisors helping to improve their understanding of alternative investments. The 2024 WealthManagement.com Industry Awards, known as the Wealthies, were awarded in September 2024 for the Alternative Allocations podcast for the period between September 2022 and May 2024. For the details of the award, including the assessment methodology and judging criteria, please refer to the official award website. Franklin Templeton did not pay an entry fee or other compensation for the award.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Diversification does not guarantee a profit or protect against a loss.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.
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