Asset management companies are actively targeting wealth channels, launching new products and investment strategies, and are expected to grow rapidly in the next decade.
However, there are potential regulatory hurdles. Rules that would limit the definition of an accredited investor and make it more difficult for advisors to recommend products with limited liquidity are discussed at the state and federal levels.
The Portfolio Alternative Investment Association represents members active in life cycle REITs, NAV REITs, business development companies, interval funds, closed-end funds and directly involved plans. The association is working with regulators to develop how the new rules will be implemented.
Wealth Management Network spoke with IPA President and CEO Anya Coverman about the expanded use of alternatives and potential regulations the association is monitoring.
This interview has been edited for style, length and clarity.
Wealthmanagement.com: Are you seeing any specific trends in terms of expanding certain types of personal vehicles? There appears to be a clear increase in asset managers looking to build products for wealth pipelines and retail investors.
Anya Coverman: you are right. We represent all types of alternative investment products targeting retail access and with low or no correlation. These products span strategies and asset types. I always say that alternative investments are not “nice to have” but “must be there.”
At a high level, the donation model has 50% allocated to alt. For pension plans, the ratio is 20% to 25%. Meanwhile, the proportion of retail investors is 1% to 2%. The latest research I saw from McKinsey predicts that this number will more than double to 5% in the next three years. These pipelines represent a significant portion of global AUM and are a significant driver of interest in our association and the space.
I’ll give you two other perspectives. Traditional models with a debt/equity split do not work the way they were traditionally designed. Many are aiming to provide the same donation model for retail access.
Another factor is that demographics are changing amid the largest generational wealth transfer in human history. In the next 15 years, trillions of assets will be transferred from the Baby Boomers to Generation X and Millennials. Therefore, having investment opportunities is an important factor. That’s why we’re still having robust discussions despite market and economic headwinds.
WM: If you look at it over the long term, as more and more Americans draw pensions, individuals will have more alternatives. The shift to defined contributions has changed the way individuals invest. Is it right?
AC: Yes. In fact, the defined contribution space has been a focus for us for a number of years. Most individual investors have DC plans. Many people invest in target-date funds and take responsibility for making their investment choices. If you compare DC performance to defined benefit plans, even today, defined benefit plans have larger allocations to alternatives and significantly outperform the 401(k) market.
Ensuring the same access and performance for investors with 401(k) plans and IRAs is important to IPA and a key initiative for us, along with allocations to private real estate and private credit from defined benefit plans, and physical assets.
WM: There seems to be a real push in this regard for limited liquidity structures such as interval funds, business development companies, tender offer funds and non-traded REITs. The pace of product launches continues to increase, and many asset managers appear to be focusing on wealth pipelines and launching these products.
AC: Many products in our space are targeted at sophisticated high-net-worth investors. Other products in our space, notably non-traded REITs and non-traded BDCs, allow any investor to invest in these strategies. To me, this is a unique product because it provides investors with the opportunity to invest in private real estate or private credit who otherwise would not have the ability to do so.
I talked about the NASAA REIT proposal last year, which included centralized restrictions on investors’ ability to invest in these products. But from a federal level, there are no restrictions. They are publicly registered like any other public company.
WM: Speaking of which, what are you focusing on regulatory right now?
AC: We expected to see proposals last year regarding the definition of accredited investors. It is on the SEC’s Reg Flex agenda. However, it is now on the Reg Flex agenda for April. We haven’t seen the proposal yet.
In December, the SEC released a staff report on its accredited investor positions. This is part of the four-year review required by the Dodd/Frank Act. At the time, the SEC did not propose changes to the definition, but they did frequently mention the expansion of the definition and concerns about more investors becoming accredited. They also question the utility of financial thresholds for measuring investor sophistication and express concerns about the inclusion of retirement savings in calculating household net worth.
As things stand, therefore, it appears that the SEC will introduce a proposal to limit the number of accredited investors by making it more difficult to obtain certification. From an IPA perspective, we don’t think this is the right approach. This definition is intended to define someone with the appropriate sophistication and ability to withstand investment losses, and can be accomplished both qualitatively and quantitatively, but strictly limits the number of investors who have access to investment opportunities to support retirement, we believe, through the long lens.
Beyond that, we’re looking at the SEC’s ESG proposal, which they say may be released in April. We are also paying close attention to NASAA’s REIT policy statement, which will impose fairly stringent restrictions on investors’ ability to purchase non-traded REITs and non-traded BDCs. Regulations regarding concentration limits have caused concern for many. NASA has since withdrawn this rule and has been fairly quiet about it. We don’t know what will happen next, but are monitoring it closely.
WM: What are the main concerns of NASA’s proposed standards of conduct?
AC: It may substantially conflict with the Best Interests Rule. This requires bureaux/departments to consider reasonably available alternatives that are less costly and riskier. This will prompt brokers to buy the cheapest securities or those they deem to be the least risky. However, securities laws do not define risk. This is a subjective decision. No consideration is given to the needs, risk profiles or portfolio diversification needs of retail clients.
A large coalition of groups is very concerned about this proposal and how far it goes beyond Reg BI. It points out certain products that NASAA doesn’t seem to like.
NASAA says this is an attempt to update and codify Reg BI, but it ultimately goes far beyond Reg BI and will be incorporated into state laws. Countries are sovereign autonomous entities, so the risk of non-uniform adoption is high.
WM: So, the question here is we already have Reg BI and don’t we need to add another layer on top of that?
AC: It clearly goes beyond Reg BI. I mentioned one of them, which is a reasonably available alternative test that Reg BI has defined. It transcends that testing and, frankly, becomes a product-specific focus, whereas Reg BI is product-agnostic. It also effectively prohibits traditional forms of broker compensation allowed under Reg Bi. If the goal is to codify Reg BI, that’s a simple sentence. But in fact, it’s not.
We are also monitoring the Department of Labor’s trust proposals. The IPA wrote a comment letter and testified.
To get away from it all, we spend a lot of time thinking about how investors can have a secure retirement and access private and public market products that meet their needs. This is an important consideration as private wealth increases significantly with large-scale wealth transfers.
We are also in the midst of a presidential election year, and Congress is even more dysfunctional than it has been in the past. Many members have left. This keeps regulators very busy. We saw last year and will continue to see more regulatory activity in 2024.
WM: Another theme I hear a lot when it comes to alternatives is the importance of education. Where is the focus of IPA’s efforts in this area?
AC: Our members include financial professionals. We are unique in that we represent not only the sell-side of asset management companies, but also financial professionals who wish to offer these investments to their clients. We are committed to education in many ways. These are more complex products. There are important revelations for investors. Advisors and clients need to understand the important benefits of these products. We host many educational sessions at our events.
Due to the high level of interest in private real estate and NAV REITs, academic professors recently published a research report examining how the addition of private real estate and mixed use NAV REITs will impact the typical industry that includes public REITs. Portfolios, bonds and stocks. It shows statistically significant alpha relative to the public market index. It is important to conduct independent research by respected academics. We are happy that this is it now. We always want to do more. We always strive to ensure educational articles, research, and discussions surrounding products in our field. This is something IPA will increasingly do in the coming years.
WM: Real estate is a big part of some of these products (range funds and non-traded REITs). But the real estate industry has also been hit hard by the difficulties, especially in the office tower sector. How do you feel about real estate investing now?
AC: Commercial real estate investing requires a long-term view. Most real estate investors share this view. We are seeing more funds launch. They don’t want to time the market based on cycles. We are in a transition period, waiting for interest rates to stabilize again. As we move into 2025, this will have a positive impact.
We are also seeing an influx of credit funds. They are hot. They are popular when there is economic uncertainty and commercial bank lending is more restricted. If a business is unable to obtain financing from traditional lenders, it will seek private credit financing. We’ve seen significant growth in private credit, with more deals emerging in the market designed to absorb some of the capital that has been redeemed.
People are also more interested in private placements. I refer to private placement in asset strategies, but private placement in private placement structure packaging. There are many new entrants, from Blue Owl to KKR to Goldman Sachs, and about $30 billion of capital is being redeemed by new funds since 2023. We are also seeing a lot of innovation in funds focused on regenerative infrastructure and emerging markets. I have a lot of conversations about decarbonization and digitalization.
I also often hear that large RIAs and wirehouses are setting up their own range funds. They have a loyal audience. They are running their own business.
This is not a slow period.
I also just participated in a conference call on interval funds and introduced different fund-of-funds structures. If we trace it back to where we started – why there is still significant growth and interest in financial advisors and RIAs – it is to address opportunities, diversifying needs, new investment models and changing demographics.
WM: What about, for lack of a better word, the technology pipeline that makes it easier for advisors and their clients to invest in alternative investments?
AC: IPA spends a lot of time on this. We have a technology, innovation and operations committee. There is room for improvement. From a pipeline perspective, there are many benefits to a 1940 Act fund structure, you can have ticker and liquidity options. There are also many new technologies advancing, including the influx of new, more sophisticated platforms and solutions. There are more opportunities for growth and will continue to improve to become more efficient and streamlined.
