NEW YORK, June 14, 2018 /PRNewswire/ -- iCapital Network, the financial technology platform democratizing alternative investments for high-net-worth (HNW) individuals and their advisors, released a report today exploring the alternative investment appetite and activities of financial advisors, including their current allocations, plans for future investments, reasons for investing and issues impacting their ability to invest in alternatives.
The report reviews investment activities across private equity funds, hedge funds and direct private deals of advisors at registered investment advisors (RIAs), independent broker-dealers (IBDs) and wirehouses who are currently offering alternative investments to their affluent clients.
Currently, 34 percent of advisors surveyed have at least five percent of client assets in private equity funds and 27 percent have at least five percent of client assets in hedge funds. Over the coming year, the majority plan to maintain or increase exposures to private equity funds (87 percent), hedge funds (61 percent) and private direct deals (93 percent), motivated mostly by potential investment returns and diversification goals.
"This research shows that advisors recognize the potential benefits of investing in alternative asset classes," said Lawrence Calcano, chief executive officer of iCapital Network. "However, the ability to access high-quality alternative investments has historically varied widely based on the business model of an advisor, a finding evidenced in this research. Our goal is to more broadly democratize alternative strategies and exposures for all high-net-worth advisors."
Advisors and Private Equity Funds
Private equity funds are the most commonly used alternative investment with 77 percent of surveyed advisors allocating to it in client portfolios.
While 66 percent of advisors have less than five percent of client assets in private equity funds, this is primarily driven by RIAs and IBDs, with over 70 percent of each cohort allocating at this relatively low level compared to just 38 percent of wirehouse advisors. Notably, nearly half (48 percent) of wirehouse advisors allocate between five percent to 10 percent whereas less than one fifth (19 percent) of each IBDs and RIAs allocate between five percent to 10 percent of their clients' portfolios to private equity. Eleven percent of wirehouse advisors are allocating between 10 percent to 15 percent to private equity funds.
The large majority (89 percent) of advisors surveyed cite attractive returns as the most compelling reason to invest in private equity funds. An outsized number of RIAs (78 percent) also point to diversification and the unique nature of the investment opportunities as reasons to invest, compared to their peers at wirehouses and IBDs, which may be related to the historically limited access to PE funds within the independent channel.
Most advisors point to finding more appropriate clients (86 percent), high minimums (61 percent) and illiquidity (53 percent) as obstacles to greater investment in PE funds, with independent advisors at IBD firms (54 percent) and RIAs (49 percent) also citing ease of access.
The majority of advisors plan to stay invested in private equity, with 54 percent of advisors planning to invest the same over the coming 12 months, 32 percent planning to invest more and 13 percent planning to invest less.
"The majority of advisors we surveyed have incorporated private equity into client portfolios due to its performance in relation to public markets over longer-term periods. The characteristics of the asset class increasingly appeal to advisors who recognize the potential to promote a buy-and-hold discipline and to seek enhanced client returns amidst challenging market dynamics," said Nick Veronis, co-founder and managing partner at iCapital Network.
Advisors and Hedge Funds
Average allocations to hedge funds are lower than to private equity funds among surveyed advisors, but similarly, higher returns and diversification are cited as the primary motivations for seeking out hedge fund investments.
Seventy-three percent of advisors invest less than five percent of their assets to hedge funds and 22 percent allocate between five to 10 percent. Wirehouses are more bullish on hedge funds than their independent peers, with 67 percent planning to maintain or increase investments, yet most (54 percent) advisors plan to at least maintain their hedge fund exposure. Like private equity, investment returns are the most popular reason for advisors seeking out HF investments. The second-most-cited reason by 60 percent of advisors is diversification.
Wirehouse advisors are less likely to cite ease of access and illiquidity as issues impacting their ability to invest in hedge funds, pointing to the differences in business model characteristics like net worth and infrastructure between advisor models.
In accessing hedge funds, IBDs and wirehouses function more similarly than RIAs. Eighty-three percent of RIA respondents gain access to hedge funds directly from GPs, although 14 percent also employ feeder funds to facilitate access. Notably, the RIAs surveyed completely steer clear of hedge fund-of-funds, consistent with the overall trend in industry assets under management over the past few years. Advisors at wirehouses and IBDs continue to use both feeders and fund-of-funds, perhaps due to legacy programs in place at their home offices.
"Hedge funds can employ a wide array of trades and strategies to take advantage of changes in the economic and geopolitical landscapes. It's critical that advisors have access to comprehensive education and due diligence when determining how hedge funds may fit into client portfolios," said Eileen Duff, managing partner and head of independent wealth solutions at iCapital Network.
Advisors and Direct Investments
Advisors are interested in private direct investments for the returns they can offer (88 percent), but also believe that these are "unique opportunities" (57 percent) more so than investments offering diversification, which differs notably from private equity and hedge fund investments. Wirehouse advisors are most likely of all advisor types surveyed to invest in private direct investments for their diversification benefits.
The average check size into private direct investments ranges from under $1 million at RIAs to between $1 million and $5 million from wirehouse and IBD advisors. Across advisors, 45 percent allocate less than $1 million, 42 percent allocate between $1 million and $5 million, and just over four percent typically invest over $10 million per deal. However, notably, almost a fifth (18 percent) of wirehouse advisors typically invest over $10 million per deal.
Advisors rely primarily on their networks (58 percent), family and friends (42 percent) and angel groups (21 percent) to source direct deal flow. Second to finding more appropriate clients (cited by 81 percent), limited deal flow (73 percent) is a major issue impacting the ability to invest in direct deals for all advisors.
The majority of advisors surveyed plan to either increase their allocations to direct investments (45 percent) or invest the same amount (48 percent) over the next 12 months. RIAs have the strongest interest in increasing exposure going forward (56 percent), which could present an opportunity for aggregation platforms offering high-quality deals and due diligence to these advisors.
"Despite the shortage of high-quality deals that are available to them, advisors have expressed more enthusiasm about private direct deals than other alternative asset types. Advisors and their clients will continue to look to their personal and professional networks to source unique investment opportunities," said Hannah Shaw Grove, managing director and chief marketing officer at iCapital Network.
Obstacles to Investing in Alternatives
Finding more appropriate clients is cited by all advisor types as the most important issue impacting their ability to invest in alternatives. Illiquidity and high minimums are also consistently highlighted as obstacles, suggesting that advisors need wealthier clients with the risk tolerance and diversification goals appropriate for these investments.
"Technology, new product structures and education are removing many of the barriers associated with investing in alternatives, but certain characteristics inherent to alternative investments that drive performance, like longer investing timeframes, will remain. This places a greater emphasis on portfolio construction expertise for advisors seeking to reap the return and diversification benefits of alternatives," said Tom Fortin, managing partner and chief operating officer at iCapital Network.
About the Research
The study was conducted with more than 450 advisory professionals inquiring about their use of and perspectives on private equity funds, hedge funds and direct private deals on behalf of clients. "Direct deals" as used in this report covers investments in small- and mid-size privately held companies, startups and other private assets such as intellectual property rights and royalties, but excludes private real estate investments.
Alternative assets can be complex, spanning multiple structures and strategies while possessing a variety of mechanics and characteristics. To ensure that we had a sample of knowledgeable respondents, this research initiative was built around advisors who have some experience with alternative investments and have clients to whom they are currently providing these kinds of opportunities.
Of the advisors surveyed, slightly over half (55 percent) are RIAs, about a third (29 percent) operate within IBDs and 16 percent service clients at private banks or "wirehouses." Over 60 percent of the advisors surveyed have over 20 years of experience. Fifty-five percent have built practices with $500 million to $750 million in assets under management, while 34 percent manage over $750 million.
About iCapital Network
iCapital Network is the financial technology platform democratizing alternative investments with complete tech-based solutions for investors, advisors and asset managers. The firm's flagship platform offers high-net-worth investors and independent wealth advisors a curated menu of private equity and hedge funds at lower minimums with a full suite of due diligence and administrative support in a secure digital environment. Banks and asset managers leverage iCapital's tech-enabled services to streamline and scale their private investment operational infrastructure. iCapital was included in the 2018 Forbes FinTech 50 and as of March 31, 2018, serviced more than $5.2 billion in invested capital across more than 12,000 underlying accounts.
For additional information, please visit the company's website at www.icapitalnetwork.com | LinkedIn: https://www.linkedin.com/company/icapital-network-inc | Twitter: @icapitalnetwork | Facebook: https://www.facebook.com/icapitalnetwork/
Disclosures: This material is provided for informational purposes only and is not intended as, and may not be relied on in any manner as legal, tax or investment advice, a recommendation or as an offer to sell, a solicitation of an offer to purchase or a recommendation of any interest in any fund or security offered by iCapital. Past performance is not indicative of future results. Alternative investments are complex, speculative investment vehicles and are not suitable for all investors. An investment in an alternative investment entails a high degree of risk and no assurance can be given that any alternative investment fund's investment objectives will be achieved or that investors will receive a return of their capital. The information contained herein is subject to change. Securities may be offered through iCapital Securities LLC, a registered broker-dealer, member of FINRA and SIPC and subsidiary of Institutional Capital Network Inc. iCapital is a registered trademark of Institutional Capital Network Inc. All rights reserved.
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