Wealth managers represent an increasingly large portion of dollars that’s being allocated to private markets. Alternative asset managers have taken notice — large platforms like Blackstone, Apollo, Carlyle, Ares and others see the wealth channel as a major capital source for fundraising going forward as wealth managers are beginning to tilt portfolios beyond 60/40.

As institutional investors grapple with the challenges of higher inflation, higher interest rates, choppier markets, and the denominator effects in their portfolio due to overweight private markets exposure, alternative investment funds will increasingly rely on the private wealth channel to raise their funds.

How is over $1.5T of AUM approaching private markets in 2023?

There’s a lot that we can learn from the perspectives of some of the industry’s top wealth managers and private markets investment platforms.

Wealth managers have the perspective of looking at private markets from a broader lens — they constantly evaluate both public and private markets to determine the best places to allocate capital on behalf of their clients. Public and private markets alike have changed dramatically over the past year, making things more uncertain for allocators of capital as well as the investment managers deploying that capital.

Where are some of the industry’s most knowledgeable wealth managers allocating capital in private markets?

We asked some of the most sophisticated financial advisors and wealth management platforms — who are collectively responsible for over $1.5T of AUM — about their views on the alts space in 2023.

Here’s what they had to say:

Lawrence Calcano, CEO, iCapital ($152.1B AUM)

We believe financial advisors will continue to increase allocations to private assets as they seek the benefit of alternatives for their clients. Traditional 60/40 portfolios have not provided the outcomes many investors expected as interest rates and inflation have risen, which is part of what has given rise to the increased interest in these products. But to successfully add alternative products to client portfolios, education is key, and on several dimensions. This includes understanding how these products work in both an absolute sense as well as how they work relative to the investments clients are used to making as part of a traditional 60/40 portfolio. Key components of these products such as liquidity — or lack of liquidity — timing of cash flows and frequency of information/reporting updates differ meaningfully. In this context, we believe that investors benefit greatly from working with qualified advisors, who can guide them and help access the information needed to make good and informed decisions.
Beyond education, two other elements contribute to the expected growth in these investments. These include (1) real access by advisors and their clients to the highest quality managers and strategies in the market, those historically only available to institutional investors; and (2) comprehensive technology platforms that help automate the experience for advisors and their clients. Taken together we believe these advancements — education, access and automation — will facilitate greater advisor and client allocations to alternative investments.
In terms of specific strategies, we expect continued interest in credit strategies generally, including direct lending, as well as infrastructure, real estate and private equity, which together potentially enhance the inflation resilience and risk-adjusted returns of portfolios. As part of our offering, we are also focused on building tools similar to those used in making public investments, that allow advisors to understand the impact of alternative allocations on investor goals and objectives. The development of these tools we believe will help more advisors offer alternatives to their clients in a thoughtful and appropriate manner relative to an investor's specific goals. Ultimately, of course, investors will judge the success of alternatives by their experiences with the asset class and the outcomes they produce.

Pierre Caramazza, Head of Global Product, Alternatives, Franklin Templeton ($1.4T AUM, $257B AUM in alts)

One of the lessons that 2022 taught many investors is that diversifying beyond traditional asset classes to solve for their long-term goals is probably a good idea. We think this will drive increased adoption of alternative assets for wealth management or individual investor channels in the coming year. Alternatives currently account for over 20% of U.S. pension fund portfolios, but less than 5% of the average wealth portfolio. We expect wealth portfolios will start to grow closer to those institutional allocations, especially as alternative asset classes become more available through product innovation.
The volatility of 2022 and a change away from a decade of historically low rates of will also prompt investors to want to better understand their risks. So we’ll start to see greater transparency in performance, and alts managers doing a better job of explaining their exposure to leverage. These trends will lead to increased adoption of interval and tender offer funds.
On the digital front, the emerging cycle of tech-innovation is built around code-based, commercial protocols where ownership is decentralized. The only way to own these assets is to purchase — or earn — the tokens associated with these business entities. We think there will be significant institutional and retail interest in having these frontier risk assets as a small part of their portfolio allocation in 2023 and beyond.
We also think we will see NFTs move beyond collectibles and novelty items and begin to be used as a wrapper for more serious investment opportunities around hard assets such as commercial real estate and cultural assets such as royalty pools.

Chip Roame, Founder & Managing Partner, Tiburon Strategic Advisors

Alternative investments are a major focus for advisors. Two-thirds of financial advisors say that they recommend alternative investments.
Financial advisors have invested 10% of AUM into alternatives, which is up from 5.7% in 2017. Tiburon CEO Summit attendees believe that financial advisor net inflows into alternatives will grow substantially or at least moderately over the next five years.
Attendees believe that real estate will have the highest importance of alternative investment products to consumers over the next five years.
How big is the opportunity for growth in the alts space? Alternatives could generate $10.9 trillion of net flows if investable assets grow at a normalized rate and allocations to alternatives rise from 10% to 20% of consumer households investable assets.

Ed Swenson, Co-Founder & COO, Dynasty Financial Partners ($68B AUM)

We continue to get a lot of question on private markets/alts in general as advisors look beyond public markets to differentiate themselves to clients.
We are focusing a bit more on private credit specifically as that is where are seeing some of the most opportunities.
For the first time in a while we are seeing interest again in long/short hedged equity. We are also getting questions about setting up custom feeder funds for individual RIAs.
As we have seen many asset managers jump into this space, we believe this is an area where pedigree matters and leverage makes us nervous. The credit space seems to be growing exponentially as we’ve seen traditional bank lending has dried up in select industries.

Samir Kaji, Co-Founder & CEO, Allocate ($310M AUM)

2022 further demonstrated the challenges of a traditional 60/40 portfolio in weather market volatility. Advisors without any programmatic strategy in alts will face significant challenges in acquiring and retaining the next-generation client who have made it clear that they are asking for a wider menu of options for diversification, specifically unique private opportunities ranging from venture capital to private credit.

Nicky Sugarman, Partner, Private Equity & Venture Capital at Stanhope Capital ($30B AUM)

We have been allocating capital to private markets every year, and 2023 will be no different. Our approach starts with the belief that timing the market is near impossible, and therefore a long-term consistent plan is the correct method. For us this means a defined allocation across private equity, venture/growth, real estate and private credit, incorporating both direct investments and fund commitments. Given the pricing environment we are now in we expect deals to be done at more realistic valuations, although competition for quality assets will be high, and therefore actual deployment may be slower than previous years. We are already seeing this across the board from early stage venture through to large buyout markets, wherein we have continued to partner with managers who have a history of investing through cycles.
That said, although the overriding market for emerging managers will be difficult, we believe there is an interesting opportunity for selectively partnering with new groups who have the potential to weather the storm well and become the leading names of the future, especially in the early stage venture market.
Within real estate we are seeing interesting opportunities across both the equity and debt side, and expect this to continue throughout the year.
For private credit we have been running slightly underweight in recent years, but think now may be the time to get closer to target.

Robert Picard, MD, Head of Alternative Investments, HighTower Advisors ($117B AUM)

Hightower Advisors continues to develop and promote investment opportunities across Multiple Private Market asset classes including Real Estate, Private Equity and Private Credit. It’s our belief that private market strategies complement HNW investors Public Equity and Public Fixed Income allocations. We see increasing domestic opportunities related to the sea change towards de-globalization and repatriation of manufacturing.

Phil Huber, Chief Investment Officer, Savant Wealth Management ($14.3B AUM)

Alternative investment education will be front and center with leadership teams at large wealth management firms. As more and more RIAs continue to embrace non-traditional investment strategies — not just ad hoc, but consistently across their client accounts and model portfolios — client facing advisors will need to be sufficiently knowledgeable and conversant across the asset classes and fund structures being offered on their respective platforms. This will lead to greater alignment, proper expectation setting, and better client outcomes.
The last twelve months were a wake-up call to the shortcomings and challenges facing traditional asset allocation. Despite the outlook for the classic 60-40 portfolio improving drastically from where it was a year ago, we still live in a very uncertain world and that requires a three-dimensional approach to portfolio construction. There’s never a bad time to diversify. Broad adoption of alts will only continue to accelerate in 2023.
Asset classes that not only survive, but thrive, in inflationary regimes, will become staples in advisor-driven, multi-asset portfolios. Examples include trend following/managed futures within liquid alts sleeves and “real asset” categories like farmland and infrastructure in semi-liquid wrappers.
2023 will be the year of Niche Credit. Direct Lending has become quite a popular asset class in recent years, for many serving as a substitute for public non-investment grade credit allocations. In 2023, advisors will seek to complement Direct Lending with strategies that traffic in some of the more esoteric areas of private credit markets (think litigation finance, royalties, etc.). These allocations will serve the dual purpose of income generation and low correlation to broader markets.

Matt Farrell, Senior Investment Manager, WE Family Offices ($13.4B)

We believe that investors should consistently invest in private markets to ensure vintage diversification. However, given broader market volatility, drawdowns in public markets with lagging private market valuations creating a denominator effect, more capital calls and fewer distributions, and potential for more post Q4 markdowns, there is an even greater need to be targeted and selective focusing on sub strategies with tailwinds.
For example, within venture capital, we believe there could be an opportunity within additive manufacturing as companies re-examine their supply chains and inventory production. Biotech/healthcare continues to have tailwinds due to demographics, government spending and consumer preferences.
Otherwise, we believe there could be an opportunity in secondaries, particularly in VC, as LPs reassess private exposures and rebalance allocations. And finally, we continue to favor real assets, although again being highly selective given the run-up in valuations in certain areas. We are evaluating several commodity and natural resource strategies which has tailwinds from energy transition, deglobalization, geopolitical events, etc.

Kirby Ott, Partner & Managing Member, Matter Family Office ($3.4B AUM)

We look at the private markets in very much a strategic mindset recognizing that the ability to be tactical is limited by many levers but beginning with the structures and reality that capital is ultimately invested at the discretion of the GP.
This leads us to taking long view that puts strong emphasis on building a strong core of managers for our families diversified across asset type and vintage year.
Satellites or niche strategies are then considered and allocated to, but tend not to be driven by tactical views but rather unique views we or our families have with respect to specific opportunities or themes that are underrepresented in their core managers.

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How will wealth managers approach private…