More turn to alternatives for longer-term financial security

There’s a new preoccupation among the super-rich: immortality. Or at least, living a lot longer with the appearance, mobility and capacity of a younger person. But despite advances in biotech, wellness, cryogenics and plain old medicine, it currently remains irrefutable that we’re all getting older. The impact of this outside of the circle of Bezos, Thiel et al. is that we’re all having to think about whether we’ve got enough money to live to a reasonable standard as we age.

Understandably, rising life expectancy is leading many to seek greater long-term financial returns from their investments. The World Health Organisation expects that, between 2015 and 2050, the proportion of the world's population over 60 years will nearly double from 12% to 22%.[1] Nation states are having to react to this changing reality, too, with a reduction or change in the provision of state pensions and healthcare and new access routes to benefit savers and enhance future retirement income. 

For many the answer is a simple one: alternative asset classes. More individuals want to invest in alternatives, and providers are responding by removing the traditional barriers.

Why alternatives?

Diversification is essential in modern portfolio theory, as portfolios that include uncorrelated returns tend to be more resilient and can outperform undiversified portfolios over time.

Alternative investments, which offer diverse return profiles, often distinct from listed securities, can help investors achieve this diversification goal, potentially enhancing investment or retirement returns. While private market investments—such as private equity (PE), debt, and real estate—have faced challenges due to changing interest rates and declining public markets, these assets have demonstrated strong long-term performance. Ocorian’s Global Asset Monitor shows that private assets are more than seven times larger (+618%) today than their $2.0 trillion level in 2009.

In fact, since around 2001, we have been in an unusually low interest rate environment, which has provided a strong tailwind to returns. This is easier to understand when we relabel PE by its old name – leveraged buyout. Alternatives/PE use a lot of leverage to finance acquisitions, so a low-interest-rate environment where debt is abundant and cheap, provides a furtive environment for them to generate alpha.

The outperformance of alternative assets can yield significant benefits for retirees. By reducing overall portfolio volatility and enhancing yield stability, private assets offer advantages during public market turbulence and lower return expectations for traditional asset classes.

Widening access to alternatives

Historically, access to alternative assets has been mainly limited to institutional investors, including defined benefit (DB) pension plans, sovereign wealth funds, and ultra-high-net-worth individuals. In contrast, retail investors have had minimal opportunities. Most retail investors have gravitated toward traditional investments, such as mutual funds and investment trusts comprised of publicly traded stocks and bonds. The lack of access to private markets is notable, especially given the rapid growth of this segment.

Barriers to retail access to alternatives include limited investment paths, regulatory concerns about complexity and risks (notably liquidity), high fees compared to publicly listed securities, and substantial minimum investment amounts. In recent years, the compelling appeal of alternative assets has prompted efforts to democratise access—referred to as ‘retailisation’. Several factors are driving this change.

Many alternative asset managers have recognised that the demand is there for their products, so are evolving their offerings to enable non-accredited individuals to invest in private markets, thereby diversifying their portfolios. Although costs remain a barrier, innovations like tokenisation may drive product development and reduce expenses for retail investors. Notably, many leading alternative investment managers aim to attract new sources of investment, including retail investors and Defined Contribution (DC) plans, which are now predominant in many countries.

Considerations for alternative asset managers

The new fund structures required to reach retail investors and DC plans introduce challenges and additional costs for alternative asset managers, including:

• Complex regulatory reporting requirements due to retail distribution.
• Necessary amendments to operational arrangements for new investor types, including enhanced reporting.
• Increased frequency of valuations for pricing periodic subscriptions or redemptions, often moving to quarterly or monthly valuations, which raises managers' workload.

Tackling the liquidity challenge

Historically, retail-focused funds and those aimed at DC plans have prioritised daily liquidity. Traditional alternative asset funds typically have fixed lifespans with few exit opportunities before maturity, which has limited retail access.

To democratise alternative assets, retail investors in DC plans must recognise that daily liquidity in illiquid asset classes is often unachievable. However, the alternative asset community must also adapt to meet the needs of retail investors and DC plans, which differ from institutional investors. Various investment vehicles offer solutions to balance redemption requests and maintain fund credibility:

• Non-traded Business Development Companies (BDCs) provide monthly or quarterly liquidity, though not guaranteed.
• Non-traded Real Estate Investment Trusts (REITs) may allow liquidity requests after a holding period but can suspend this provision during downturns.
• Funds might limit redemptions, balancing the need to protect remaining investors against maintaining liquidity credibility.

Facilitating redemptions may impact performance, as funds must hold cash or equivalents, yielding less than private assets. Current fund developments typically maintain 10-15% in liquid assets for managing redemptions, necessitating effective management of both liquid and illiquid assets, which complicates fund construction and may increase costs compared to traditional alternative asset funds.

Structural innovation

We know that high-net-worth individuals and wealthy families have long wanted to boost their allocation to private equity, and have outlined why it hasn’t always been easy. Investment vehicles are typically complex and minimum commitments are high, with long lock-up periods and capital calls. 

Another structure which is gaining popularity to combat this is evergreen funds, which are open-ended private market funds that have gained traction particularly among private banking investors keen to invest in private equity. Investors in evergreen funds can typically seek liquidity from their position through redemptions, which are granted in monthly or quarterly instalments, offering investors a flexible and convenient way to play the asset class. They offer increased liquidity features, and a potentially greater overall utilisation of capital compared to drawdown funds.

The minimum commitment amounts are also far more digestible, enabling more investors to build a diversified portfolio of private market investments from the get-go.

Evergreen funds are not the only tool being used by private equity firms to widen their access to capital. Many asset managers are considering other novel and tailored alternatives, including the use of sidecars, feeder funds and funds-of-private-funds that are available to retail investors through wealth manager channels.

Experimenting for a longer, better future

While the super-rich investigations into science-fiction-sounding technology to prolong their lives may be outside the comprehension of many of us, their impulse to secure comfort and security into later life is an almost-universal one. 

Providers are also experimenting and investigating what will enable a greater retailisation of alternative assets; the demand is there, and investment managers are reacting. 

Alternatives are becoming more popular and better understood but remain a complex area for individual and retail investors. Ocorian’s breadth of expertise and corporate services experience are being called upon increasingly often for everything from fund formation to SPVs. Get in touch to understand how Ocorian’s services can support your alternative investment strategies.