Preferred Alternative Investments in the Current RIA Landscape

February 6th, 2024, 11:15 AM

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WealthManagement.com engaged executives from seven RIA firms to explore how advisors approach this decision-making process, focusing on the most appealing alternative investments and their potential role in future allocations. Advisers emphasize viewing alternatives in the context of their role within clients' overall portfolios, prioritizing their function over the mere pursuit of returns. Derek Newcomer, Director of Investment Research at independent advisory firm Beacon Pointe, underscores the importance of communicating to clients that alternative investments are long-term plays, often requiring a commitment of seven to 10 years with reduced liquidity.

While the comfort level with alternative allocations varies among clients, advisers note a general increase in interest, driven in part by clients seeking to boost investment returns in response to higher interest rates. The approach to alternative investments reflects a strategic consideration of their role, emphasizing long-term commitment and aligning with clients' overall portfolio objectives. Here are the alternative investment categories to which advisers are paying the most attention right now, according to WealthManagement.com:

Joe Raieta, Snowden Lane Partners: According to Raieta, three alternative investment verticals currently in focus are growth equity, credit, and real estate, each presenting unique opportunities within the market landscape. These alternative investments—growth equity, credit, and industrial real estate—offer investors strategic avenues for potential growth and value in the evolving market conditions.

Gary Quinzel, Wealth Enhancement Group (WEP): WEP considers alternative investments within a portfolio context, focusing on achieving specific objectives rather than pursuing singular strategies. Different alternatives cater to varying goals: private equity for return enhancement, alternative income for yield generation, tangible assets for price stability, and hedge funds for lower volatility. Emphasizing a conservative approach, a preference for private equity, particularly in small and middle-market leveraged buyouts, is highlighted. The allocation strategy extends to venture and growth opportunities, with an observed rebound in venture capital entry points. The emphasis on stable returns with lower leverage positions core real estate as a valuable component within the portfolio.

Derek Newcomer, Beacon Pointe: At Beacon Pointe, the approach to alternative investments is strategic, emphasizing diversification and return enhancement rather than a singular focus on returns. The firm maintains a consistent allocation to alternatives, including private equity, private credit, private real estate, and other real assets. Adjustments to allocation targets are made based on the prevailing market conditions. Presently, Beacon Pointe holds confidence in private credit, citing elevated yields, stability in the lower and upper middle markets, and the ability to achieve a premium over public markets. Despite market complexities, pockets of opportunity in real estate, particularly in industrial and multifamily sectors, are identified. Private equity remains consistent, and the positive outlook extends to the private credit space.

Christopher Burrows, Cerity Partners: Cerity has been actively engaged in tech lending over the past two to three years and maintains its involvement in this area. However, the firm is strategically shifting some capital towards equity, particularly in later-stage venture investments. The preference for late-stage ventures is based on valuations, where despite significant growth, businesses are trading at levels similar to two or three years ago. Cerity acknowledges the need for careful investment selection in this space. Simultaneously, the firm continues its focus on tech lending. In the real estate sector, Cerity's primary approach is real estate debt, leveraging the attractive returns observed in this market, particularly as commercial banks have withdrawn from commercial real estate debt markets.

Nick Zamparelli, Sequoia Financial Group: At Sequoia, private debt is considered an attractive investment opportunity due to the retreat of traditional lenders, creating an opening for private credit managers to secure better-than-average coupons. The current landscape favors private debt investors with appealing yields and advantageous bargaining power on financing terms. Despite the recent increase in interest rates, private credit remains a robust asset class. In an environment of gradually declining rates, returns for private debt may face some erosion, but they are expected to remain resilient. The favorable terms resulting from banks pulling back help offset some of the associated risks in the near term. Sequoia is also exploring opportunities in secondaries and co-investments within the private equity space, aligning with trends indicating a growing interest among private equity investors for increased liquidity.

Eric Beiley, Steward Partners Global Advisory, LLC: Steward prefers distressed debt markets, citing them as top choices for allocating funds in the alternative space, along with private credit. Additionally, he highlights successful ventures in the real estate market, particularly with single-family home managers involved in rental properties. Steward emphasizes the popularity and longevity of commitments in private equity, advising clients to understand the extended time horizon associated with such investments. Furthermore, he actively allocates to private credit, channeling new funds into this space for clients.

Patrick McGowan Sanctuary Wealth: At Santuray, private credit investments are deemed more attractive, especially as traditional banks limit lending, creating opportunities in corporate lending, asset-based lending, and commercial real estate lending. However, this space's crowded nature necessitates focusing on competitive differentiation for success. The firm sees appeal in private equity GP capital solutions, GP-led and LP-led secondaries, GP stakes, and NAV lending, driven by higher interest rates and lower multiples. In the infrastructure sector, the maturity of institutional-quality evergreen funds in the high-net-worth space makes infrastructure investments appealing, offering uncorrelated returns and potential growth fueled by government-backed dollars in energy transition and infrastructure projects.

Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.

Preferred Alternative Investments in the Current RIA Landscape

February 6th, 2024, 11:15 AM

Joe Raieta, Snowden Lane Partners: According to Raieta, three alternative investment verticals currently in focus are growth equity, credit, and real estate, each presenting unique opportunities within the market landscape. These alternative investments—growth equity, credit, and industrial real estate—offer investors strategic avenues for potential growth and value in the evolving market conditions.

Gary Quinzel, Wealth Enhancement Group (WEP): WEP considers alternative investments within a portfolio context, focusing on achieving specific objectives rather than pursuing singular strategies. Different alternatives cater to varying goals: private equity for return enhancement, alternative income for yield generation, tangible assets for price stability, and hedge funds for lower volatility. Emphasizing a conservative approach, a preference for private equity, particularly in small and middle-market leveraged buyouts, is highlighted. The allocation strategy extends to venture and growth opportunities, with an observed rebound in venture capital entry points. The emphasis on stable returns with lower leverage positions core real estate as a valuable component within the portfolio.

Derek Newcomer, Beacon Pointe: At Beacon Pointe, the approach to alternative investments is strategic, emphasizing diversification and return enhancement rather than a singular focus on returns. The firm maintains a consistent allocation to alternatives, including private equity, private credit, private real estate, and other real assets. Adjustments to allocation targets are made based on the prevailing market conditions. Presently, Beacon Pointe holds confidence in private credit, citing elevated yields, stability in the lower and upper middle markets, and the ability to achieve a premium over public markets. Despite market complexities, pockets of opportunity in real estate, particularly in industrial and multifamily sectors, are identified. Private equity remains consistent, and the positive outlook extends to the private credit space.

Christopher Burrows, Cerity Partners: Cerity has been actively engaged in tech lending over the past two to three years and maintains its involvement in this area. However, the firm is strategically shifting some capital towards equity, particularly in later-stage venture investments. The preference for late-stage ventures is based on valuations, where despite significant growth, businesses are trading at levels similar to two or three years ago. Cerity acknowledges the need for careful investment selection in this space. Simultaneously, the firm continues its focus on tech lending. In the real estate sector, Cerity's primary approach is real estate debt, leveraging the attractive returns observed in this market, particularly as commercial banks have withdrawn from commercial real estate debt markets.

Nick Zamparelli, Sequoia Financial Group: At Sequoia, private debt is considered an attractive investment opportunity due to the retreat of traditional lenders, creating an opening for private credit managers to secure better-than-average coupons. The current landscape favors private debt investors with appealing yields and advantageous bargaining power on financing terms. Despite the recent increase in interest rates, private credit remains a robust asset class. In an environment of gradually declining rates, returns for private debt may face some erosion, but they are expected to remain resilient. The favorable terms resulting from banks pulling back help offset some of the associated risks in the near term. Sequoia is also exploring opportunities in secondaries and co-investments within the private equity space, aligning with trends indicating a growing interest among private equity investors for increased liquidity.

Eric Beiley, Steward Partners Global Advisory, LLC: Steward prefers distressed debt markets, citing them as top choices for allocating funds in the alternative space, along with private credit. Additionally, he highlights successful ventures in the real estate market, particularly with single-family home managers involved in rental properties. Steward emphasizes the popularity and longevity of commitments in private equity, advising clients to understand the extended time horizon associated with such investments. Furthermore, he actively allocates to private credit, channeling new funds into this space for clients.

Patrick McGowan Sanctuary Wealth: At Santuray, private credit investments are deemed more attractive, especially as traditional banks limit lending, creating opportunities in corporate lending, asset-based lending, and commercial real estate lending. However, this space's crowded nature necessitates focusing on competitive differentiation for success. The firm sees appeal in private equity GP capital solutions, GP-led and LP-led secondaries, GP stakes, and NAV lending, driven by higher interest rates and lower multiples. In the infrastructure sector, the maturity of institutional-quality evergreen funds in the high-net-worth space makes infrastructure investments appealing, offering uncorrelated returns and potential growth fueled by government-backed dollars in energy transition and infrastructure projects.

Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.