It used to be that private equity, hedge funds, real estate and other alternative investments were for only institutional investors like pension funds and foundations or the wealthiest of the wealthiest individual investors.
But for a variety of reasons, including a slowdown in initial public offerings and increasing accessibility, alternative investments have been gaining traction with a wider range of individual investors over the last several years. And experts believe the trend will continue to grow.
Decades ago, “the only entities or investors who were concentrated [on] or getting exposure to alternative investments were institutions, or the mega, mega wealthy,” said Marty Gregor, a private wealth adviser with Merrill Private Wealth Management, which is part of Merrill Lynch Pierce Fenner & Smith Inc. Merrill Lynch, in turn, is part of Bank of America Corp.
Generally speaking, the term alternative investments (or alternative assets) refers to anything that’s not a publicly traded stock, bond or cash. Common types of alternative investments include private equity, venture capital, hedge funds and real estate. (Some sources also define assets such as fine art and cryptocurrency as alternative investments.)
Because of the opaque and loosely regulated nature of alternative investments, it’s difficult to precisely quantify the increase in individual-investor participation in recent years.
According to a May 2023 report from Boston Consulting Group, alternative investments represented 14% of global assets under management in 2015, or $9 trillion out of a total $65 trillion. By 2022, alternative assets had grown to represent 21% of global assets under management, or $20 trillion of a total $98 trillion.
By 2027, Boston Consulting Group projected, alternative assets under management will total $29 trillion of a total $128 trillion, or 22% of total global assets under management. The report does not specify what percentage of those alternative assets are held by individual investors versus institutional investors.
Wealth advisers, however, say they’re seeing the growth firsthand.
Gregor said Merrill has offered alternative investments to its clients for at least 25 years, but investor interest has picked up considerably recently.
The total value of alternative investments Merrill has under management has doubled over the past five years, Gregor said, and “the pace of that growth is largely being driven by individual clients.”
Carmel-based Valeo Financial Advisors LLC has also seen increasing client interest in alternative investments over the past five years or so, said Tom Askey, the firm’s chief investment officer. “There is a hunger and a thirst to have more private transactions.”
Risks and rewards
To be sure, these investments aren’t for everyone. In general, they’re suitable only for so-called accredited investors—those who have at least $1 million in investable assets. These types of investments are also less liquid than traditional investments; once you invest in an alternative asset, your money might be tied up for 10 years or even longer.
The investments also typically carry higher fees and are complex—enrolling can require 50 pages or more of paperwork. And they’re typically riskier than traditional investments.
“There’s a chance you’ll lose your money. And if you’re not comfortable with that, you’re probably not suitable for alternative investments,” Askey said.
For those willing and able to participate, however, alternative investments can offer the chance for higher returns than what can be obtained through traditional investments.
Private equity, for instance—investments in privately held companies—offers the potential for returns of 25% per year, said Jason Brown, founder and CEO of Carmel-based financial firm Proteus LLC.
In comparison, the S&P 500 stock index has delivered an average annual return of 10.6% over the past 10 years.
One reason for the disparity between public and private investment returns is that companies are generally waiting longer than in years past to go public—if they choose to go public at all. So by the time those companies launch an initial public offering, they have often already passed the growth period that can bring investors big returns.
“What that means is that there’s less opportunity for the public to participate in the growth of the company,” Brown said. “A significant shift has happened that’s moved the vast majority of that value and wealth creation out of the public space and into the private space.”
Another factor driving the growth in alternative assets: It’s become easier for more investors to participate.
“There’s been immense innovation in both technology and products that has allowed the broader investor class to get access to the private markets,” said Bill Andrakakos, chief investment officer at Chicago-based Aaron Wealth Advisors, which also has an office in Carmel. “Those have really been coming to market over the last couple of years.”
These new technologies and products are streamlining the process of making alternative investments, Andrakakos said, and they’re making it possible for individuals to invest at lower minimums.
One of these newcomers is Proteus, which launched its investment platform several years ago.
The Proteus platform is geared to banks, independent wealth advisers, trust companies and other customers that want to offer alternative investments to their clients. Proteus offers a vetted selection of alternative investment options that its customers can offer their clients. Proteus also streamlines the process of making and managing the investments. The company’s platform makes it possible for financial advisers to get their clients into alternative investments at a lower minimum investment than would otherwise be possible.
Evansville-based Old National Bank plans to use the Proteus platform when the bank begins offering alternative-investment options this quarter through its wealth management division, called 1834.
Cleveland, Ohio-based KeyBank, which has a significant Indianapolis presence, started using the Proteus platform in 2022 so it could offer alternative investments to more of its wealthy clients.
“It was an effort to provide more of these unique strategies to our smaller accredited-investor clients,” said Gary Forbeck, an Indianapolis-based senior portfolio strategist with the bank.
Forbeck said KeyBank began offering alternative investments to its institutional clients about 20 years ago. From there, the bank extended alternative investments to its family office clients—generally, clients with at least $30 million in assets.
Over the past several years, alternative investments have trickled down to clients with smaller amounts of wealth. Now, he said, a platform like the one Proteus offers allows investors with as little as $1 million in investible assets to participate.
Marc Dizard, Cincinnati-based chief investment strategist at PNC Asset Management Group, said alternative investments have also been attractive to investors worried about the performance of the stock market and the broader economy in recent years. The PNC Asset Management Group is part of Pittsburgh-based PNC Bank, which has a significant presence in the Indianapolis market.
Alternative investments tend to perform independently of public markets; they can do well even if stock and bond markets decline.
“They can act as a diversifier,” Dizard said.
He credited the federal opportunity zones initiative, which was created as part of the Tax Cuts and Jobs Act of 2017, as helping to spur participation in alternative investments. The initiative created substantial tax breaks for those who invest their capital gains in a real estate development or business in a designated opportunity zone. By their nature, these types of investments are considered alternative investments.
A less tangible factor—the human psyche—is also at play, Dizard said. “People love to be involved in a private transaction. There’s a little bit of psychology in that.”•