From 60/40 to 50/50
Alts hiding in plain sight
I was listening to a great podcast recently on Ted Seides’ Capital Allocators with guest Mario Giannini, the CEO of Hamilton Lane, a leading alternative asset manager with almost $1T assets under management and advisement.
Mario said something that caught my attention. He said that in 10-15 years investors’ portfolios will be comprised of 50% public markets and 50% private markets exposure. That’s quite a far cry from the 60/40 portfolio (100% public markets exposure) of recent times.
Could investors soon have portfolios that are comprised of 50% public markets exposure and 50% private markets exposure?
As alts continue to go mainstream, this prediction seems increasingly less crazy. I’ve written about how investors’ portfolios have changed, and we no longer live in the era of the 60/40 portfolio. But Mario’s quote represents an even bolder statement about the future of private markets.
We are in the early innings of witnessing an evolution in the alts space over the past 15-20 years — for both institutional and retail investors. As investment product innovation continues, alts should feature as a larger part of investors’ portfolios. As technology innovation continues, alts should be more easily distributed to more investors.
We need to remember that the hedge fund and private equity industries really began in earnest around 30 years ago. The private equity industry only surpassed $1T in AUM in 2006.
Goldman predicts that alts industry AUM could reach over $30T by 2026, which signals that alts has meaningful runway to grow. Even if that prediction from April 2022 is dampened due to the current market environment, the alts space should continue to grow from its current figure of ~$10T in industry AUM.
An inflection point for alts
There is a lot of room to run for an ever-growing alts industry. But now appears to be the inflection point for a few reasons.
First has been the market structure evolution. The foundations have been laid for the technology layer to enable more accessibility to alts and a better user experience for both LPs and GPs.
Innovations in technology solutions and infrastructure across the lifecycle of an investment have allowed fund managers to serve a different LP customer type (read: retail investors) and innovate on new product structures.
Distribution downstream (to retail) and mainstream (becoming an increasingly larger part of investors’ portfolios) have been the major innovation in the alts space over the past few years.
And companies from iCapital to Moonfare to AngelList to Republic to CoinList to Carta to Forge are being minted as unicorns building efficient and durable businesses that have begun to crack the code on distribution of alts.
Technology innovation has played a role in unlocking distribution of alts across the spectrum of funds, direct investments, crypto, and collectibles.
Second has been innovation in data and transparency across the lifecycle of an alternative investment, which has enabled investors to understand where alts fits into their portfolios and how they can manage their alts exposure either through liquidity options in the secondary market or figure out how to balance their alts exposure with their exposure to other asset classes.
Distribution platforms have either enabled more participation and engagement with private equity or provided the template for similar, but geographically focused businesses to be created.
Alts go to 50/50 as platforms build out more products and services
The buildout of these distribution platforms has paved the way for these platforms to offer more products and services to both sides of their marketplace.
Companies like AngelList, Carta, and Party Round have seeded their respective platforms with funds, companies, and investors, only now to be able to build other products for these constituents.
For AngelList, that’s meant moving beyond SPV infrastructure for investors to offering startup banking services and rollup vehicles to companies who want to streamline capital raising and investor management.
For Carta, that’s meant moving beyond a software offering that provides cap table management and 409A valuations to providing a secondary marketplace for investors and equity owners and a fund administration services to VC funds.
For Party Round, that’s meant moving beyond SPV infrastructure to enable companies to raise rounds from smaller, value-added investors to offering a next generation (read: Web2.5 / fiat and crypto rails) suite of banking and financial services products for startups.
Similar innovation is happening across all corners of the world. Europe is witnessing its time at the center of the alts universe. Different regions have unique regulatory regimes that dictate how investment products are distributed through private wealth and retail channels.
Alts will become a larger part of investors’ portfolios as regions like Europe and Asia figure out how to serve HNW channels with alts product distribution.
Moonfare, a fund access platform for European HNW investors, partnered with Fidelity International and recently hit a $1B valuation after completing a round with Insight Partners.
Vauban, a SPV infrastructure provider with over $1B under administration, was recently acquired by Carta as they expand into Europe and serve funds and investors in a regulatory compliant manner.
Seedrs, the UK’s largest crowdfunding platform that has facilitated over £2B in investments, was acquired by alts unicorn Republic to build the world’s first global private investment platform.
Bunch, a SPV infrastructure provider with over €160M under administration, recently raised over €7M from Cherry and others to build the infrastructure for investors to launch SPVs and funds and trade those LP interests over time.
Betterfront, an all-in-one fundraising platform and digital placement agent, is building the pipes for data on private funds.
Latitud, a provider of services to help startups in Latin America, recently raised over $10M from a16z and a cadre of LatAm funds and operators to build the infrastructure to enable founders in the region to open up venture backable companies 5x cheaper.
Horizontal expansion of alts platforms helps alts go mainstream
The most interesting thing about many of these businesses? They can go horizontal to offer more products as much as they can go deep to serve a specific customer type.
Carta and AngelList have both proved to be case studies in companies that targeted an initial market or wedge (Carta with cap table management and AngelList a fundraising tool for smaller investors) could expand into a much bigger vision and serve their customers horizontally.
The alternative investment space may prove to be that for everything from startups to funds.
There are a host of products and services that can be offered to investors, companies, and funds. Once platforms own the atomic unit of value, they can then offer other products.
Bigger businesses are hiding in plain sight
Many alts platforms have other products and services hidden within them. Much bigger businesses are hiding in plain sight.
Platforms that serve funds have the ability to provide lending and liquidity products or secondary investment offerings to fund managers or investors.
Platforms that serve companies have the ability to provide a suite of banking services to their startup customers.
Platforms that serve investors have the ability to provide lending products or wealth management services to investors.
Horizontal expansion of alts platforms also means that alts will become more ubiquitous in investors’ portfolios. Data on these platforms will be leveraged to create compelling investment products for the different customers that these platforms serve.
In the not too distant future, investors will be able to gain exposure to all sorts of investment products across the alts spectrum, from private equity to venture capital to private debt, as many of these platforms to offer different banking and investing products.
It would not be at all surprising to see these companies far outstrip the initial market sizes that many think these companies have with their initial product offering or customer segment served.
We are very much in the early days of the adoption curve and technology innovation of market infrastructure in private markets.
Many category defining companies are about to be built.
It is time for alts to shine bright.