Wealthy investors are expected to look beyond stocks and bonds, prompting private banks to expand offerings and expertise.
Publicly traded stocks and bonds have been great investments over the last 15 years, but wealthy investors are increasingly looking for alternatives to what the public securities markets offer them.
Whether from fear that public stocks are overvalued, that inflation will rise again, or that market volatility will increase going forward, wealthy investors want a change from the traditional.
Private banks are gearing up to help provide alternatives.
“Historically, [private investors] have been under-allocated to alternative assets compared to institutional investors, but we’re seeing a strong rise in demand,” says Mark Sutterlin, head of alternative investments at Bank of America Private Bank and Merrill Lynch. “We think most of our clients would be better off with an alternatives allocation around 25%.”
That would represent a huge shift in investing behavior for high-net-worth (HNW) investors. According to a 2023 report from consulting firm Bain & Co, ultra-high-net-worth investors and family offices with more than $30 million in assets already have 22% of their wealth invested in alternatives. But those with $5 million to $30 million in assets allocate only an average 3% to alternatives and those with $1 million to $5 million just 0.7%.
With individual investors and family offices holding more than half of the $289 trillion in global assets under management, that represents a huge, largely untapped pool of capital for alternative asset managers. It also represents a major challenge for private bankers aiming to help their HNW clients navigate new investment markets.
Preqin, an alternatives research firm, is forecasting that alternative assets under management—including private equity and credit, venture capital, hedge funds, real estate, and infrastructure investments—will rise from $16.8 trillion at the end of 2023 to $29.22 trillion by the end of 2029. Increased fundraising from private banks, family offices, and individual investors is expected to fuel the growth.
While Preqin is forecasting growth in all segments of the alternatives market—including hedge funds, which suffered an abysmal 2022 when both stocks and bonds took double digit losses—private equity and credit are the hottest markets.
“There’s been a tremendous amount of interest in private equity and private credit all along the wealth spectrum,” says William Whitt, analyst with Datos Insights who focuses on wealth management. “I expect the strong demand will likely last a couple more years as long as the economy stays healthy.”
Kinder, Gentler Offerings
Fueling the demand are kinder, gentler investment offerings from private asset managers.
“The preeminent sponsors recognize the opportunity and have become better partners with investors,” says Sutterlin. Large firms like Blackstone Group, KKR & Co, and Apollo Global Management have launched funds with smaller investment minimums, lower fees, greater transparency and even a degree of liquidity (see sidebar). “Investors are getting better access to the best strategies on better terms. Everything is changing in favor of end investors.”
Some banks are launching separate entities to help shepherd investors into private markets. Deutsche Bank launched DB Investment Partners just over a year ago to give institutional and HNW investors access to private credit investments. With floating interest rates, these vehicles have been in high demand for the last several years. DB Investment Partners operates independently and Deutsche is retaining its existing private credit business.
While the demand for alternatives is most developed in North America and Europe, Asia too is trending alternative.
“We’re seeing much more demand from our clients across the spectrum of alternative assets,” says Chee Jiun Wen, head of alternative investments at Bank of Singapore. “It’s not just about reducing risks but generating alpha and accessing opportunities you can’t get in the public markets.”
The bank, formerly known as ING Asia Private Bank, has been hiring people with institutional backgrounds and experience in alternatives markets. Its roughly 500 relationship managers get in-house training on alternative asset classes and how to incorporate them into client portfolios.
“We’ve been able to expand the investment universe for our clients and provide access to more investment solutions and investing strategies,” says Chee.
The bank is doing the same for its financial intermediary clients. Last year it launched a digital platform in partnership with global fintech firm iCapital that provides independent asset managers (IAMs) with access to over 1,600 funds from 600-plus firms. The site also offers research and tools for due diligence and reports and performance updates on fund investments.
“We’re a first mover in this space in Asia,” says Chee. “We’re giving IAMs the power to pick and choose the managers and investing strategies that make sense for their clients.”
A Key Differentiator
For private banks, helping wealthy clients increase their exposure to alternative assets smoothly and successfully will be a key differentiator in the wealth management industry going forward. While most have experience investing in alternatives for their wealthiest clients, the scale of the expected shift into alternatives in the HNW client space will be a major challenge for firms.
“There is a huge opportunity in private wealth, but banks need to be prepared for the growth,” says Trish Halper, CIO in the family office practice at Northern Trust. Halper’s clients have been investing in alternatives for decades with average allocations between 30% and 50%. “Family offices were early adopters in the alternatives space and high-net-worth investors are now catching up.”
The workload for financial advisors is significantly heavier with private market assets than with publicly traded stocks and bonds.
“The dispersion of returns is much wider in private markets than in public markets, which makes manager selection really important,” says Halper. “Banks need to devote enough resources for strong due diligence because access to information and data is much less in the private markets.”
The sourcing of quality investments is just the beginning. Private asset portfolios need to be diversified across sectors, vintages, and financial sponsors to reduce risk; the investments and the asset managers themselves need to be monitored; capital call obligations must be executed; and distributions need to be managed when investments mature.
“There are a lot more operational and administrative tasks involved in private investments,” Halper notes.
The growth in alternative asset markets represents a major shift in the private banking landscape. Banks across global markets are investing in technology and talent to handle the transition and to ensure that alternatives allocations help to optimize clients’ portfolios and meet their financial goals.
“The capital markets have evolved,” argues Bank of America’s Sutterlin. “For investors who want a truly diversified portfolio, if they’re not invested in private markets in both equities and fixed income, they’re not in a big part of the capital markets now.”
