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Over the past decade, private equity investments have outperformed public equities, but many retail investors have been locked out of investing in this asset class. A new report by BNY Mellon suggests that this could be changing as access to alternative investments opens up and defined contribution plans start investing in this asset class.
Retail investors historically gained access to alternative investments through defined benefit (DB) pension plans. However, as defined contribution (DC) plans gained popularity and DB plans fell from grace, many retail investors lost access to alternatives, Ramin Kamfar, founder and CEO of Bluerock, an alternative asset manager focused on real estate told RIA Intel.
Today alternative assets — and their benefits — are mainly limited to institutional investors and the ultra-wealthy.
This could be changing.
“In recent years, the appeal of alternatives’ past stronger returns have become sufficiently compelling to spur efforts by private markets to democratize alternative assets by broadening access to them — so-called retailization,” wrote BNY Mellon.
The report cited demographic trends — including retirees living longer — and governments’ efforts to lower their costs for supporting retirees as drivers of the increased retailization. BNY Mellon wrote that “democratizing access to savings vehicles also seemingly aligns with many governments’ social objectives as part of their environmental, social, and governance (ESG) strategy.”
“In response, many countries are creating new access routes that could benefit savers by increasing future retirement income,” BNY Mellon continued. “They have begun to loosen existing investment frameworks and guidelines or sought to create new alternative asset product structures to make alternative assets more accessible to retail and individual investors.”
Another driver cited by BNY Mellon is industry economics. “Alternative asset managers are keenly aware that the DB plans that have been a mainstay of investment in recent decades are in long-term decline,” wrote BNY Mellon. “Consequently, many leading alternative investment managers are looking to attract new sources of investment, including from retail investors and DC plans, which are now the predominant pension plan type in most countries.”
In 2020, the Department of Labor issued an information letter stating that DC plans can incorporate certain private equity strategies like target date funds.
“The DoL guidance helps address an important hurdle for DC plan managers, who have to date been reluctant to meaningfully incorporate private markets exposure into DC plans, including 401(k)s, for fear of non-compliance with their fiduciary duty under federal law,” the BNY Mellon report stated.
For non-institutional investors, advisors remain the main drivers of alternative sales.
Despite this, only about half of advisors allocate to alternatives, and those that do allocate only about 5 percent or less, according to Cerulli Associates, a wealth and asset management research and consulting firm.
However, in recent years, advancements in product development have increased accessibility to alternatives and lowered some of the barriers investors and advisors have faced.
Last year, iCapital, an alternative investments platform used by more than 100,000 financial advisors and more than 250 asset managers, surveyed 400 registered financial advisors and found that 95 percent planned to allocate more or the same to alternative investments.
Companies like Velvet, an alternative investment marketplace that recently raised $30 million in private equity funding, as well as exchanges like Forge Global, InvestX, and Sandhill Markets help advisors buy baskets of private stocks for clients.
Advisors and investors who are able to add alternatives might be better off during retirement.
A study by Willis Towers Watson and Georgetown University found that the inclusion of alternatives in DC plans could increase a retiree’s annual retirement income by as much as 17 percent.
“At a time of soaring energy costs and high inflation, that 17% difference between a portfolio solely focused on publicly listed securities and one that incorporates alternative assets could help shield pensioners from further forthcoming shocks and cost of living increases,” wrote BNY Mellon.
