(Originally published by Benjamin Laker on Forbes.com)
Alternative asset classes are exploding globally in popularity, with all kinds of investors — from institutions to intermediaries and retail — embracing alternative investment strategies. Due to their potential ability to stem volatility, increase income and add uncorrelated asset classes to meet investors’ financial needs better. In its most recent report, the research firm Preqin projects that the Global Alternatives AUM will hit $23.21 trillion by 2026, up from an estimated $13.32 trillion at the end of 2021 (11.7% CAGR).
The evidence of this is clear to see. For example, many high-potential, growth-stage companies remain under private ownership, private equity firms take publicly traded corporations private and much of the commercial real estate business is in privately held vehicles. The implications for leaders, and strategy, are therefore sizeable.
As demand for alternative asset classes grows, the light shines ever more brightly on the existing infrastructure within the alternative investment space. Unfortunately, in many cases, it reveals a system that’s still wedded to the old way of working: with a cumbersome over-reliance on inefficient, paper-based and other manual systems.
These significant operational issues plague the world’s most well-known and prominent alternative investment fund managers and investors. Fortunately, these antiquated processes are rapidly being disrupted by FinTech firms leveraging new digitalized and scalable technologies that significantly reduce costs and time to market and create meaningful operational efficiencies for investment managers, advisors and investors.
These operational issues plague the world’s best and biggest alternative investment fund managers and investors. Fortunately, these antiquated processes are rapidly being disrupted by FinTech firms leveraging new technologies.
Innovation Gathers Pace
Among the firms leading the charge are iCapital, CAIS, Moonfare and RealBlocks. Together, these four platforms have raised over $1.2 billion in venture funding and service more than $165 billion of client assets. While all of these platforms exist within the burgeoning alternative investments landscape, they have each been able to carve out a piece of the ever-growing pie.
iCapital and CAIS have established themselves among Independent Broker Dealers, RIAs, and wirehouses as leading distribution and education platforms. Both firms have invested heavily in educating the market on the benefits of investing in alternative investments. CAIS IQ is an educational tool designed to equip financial advisors with the information needed to inform their clients on alternative investments. iCapital also offers its own program, AltsEdge (in partnership with CAIA), which is geared towards delivering similar outcomes for financial advisors. “The best results occur when financial advisors and their clients are appropriately informed on the risks and considerations of investing in alternatives,” said Lawrence Calcano, chairman and CEO of iCapital, in a company statement.
Moonfare relies on its in-house investment team to conduct due diligence on private equity funds before onboarding them onto the platform. From there, individual investors and their advisors are able to invest in private equity funds directly.
RealBlocks has taken a different approach in the marketplace, providing a pure business-to-business (B2B) technology solution for investment managers. “While CAIS and iCapital offer excellent capabilities for distribution and education, we are focused on providing our clients with a suite of services with the potential to increase their operational efficiency greatly,” said Scott Brooks, chief operating officer at RealBlocks. “Our platform is designed to make the lives of asset managers easier through a digital solution that improves distribution capabilities, allows for efficient fund formation, and seamless fund administration as well as client onboarding, including digital issuance.”
The transformation to a better ecosystem for the alternative investment world is well underway and offers limitless upsides for asset management firms that proactively embrace this shift. These emerging platforms provide numerous benefits to investment managers, including streamlining the client onboarding process, building funds such as feeder funds, co-investments, and direct investments while unlocking new distribution opportunities.
Reinventing the Investor Experience
Historically, alternative investments have been notoriously difficult to access. For retail investors, it’s been particularly painful, but challenges also exist for large institutional investors. For example, it can take fund managers three to six months to onboard a new investor, with a web of regulations to navigate around Know Your Customer (KYC) and Anti Money Laundering (AML) laws that vary by regulatory environment and significantly slow the onboarding process.
The new generation of solutions, however, brings not only automated online onboarding workflows that remove much of the burden of welcoming new investors. In addition, players in the space are delivering user-friendly and intuitive products that allow for one-stop-shopping. They have built the necessary security protocols, such as SOC II Type 2, to safeguard the exchange of highly sensitive information globally.
Asset managers can shrink their onboarding timelines and improve the overall investor experience. Solutions like RealBlocks offer fully customizable platforms with white-labeled interfaces, while solutions like iCapital deliver a robust one-size-fits-all marketplace.
Fueling Rapid Growth – All Over the World
As our society, economy and financial infrastructure become increasingly globalized, investors from across the globe are looking to the U.S. market for access to alternative investments. At the same time, many U.S. investors are eager to embrace emerging alternative assets in developing markets in Asia, Europe, Latin America and beyond.
Many U.S. based funds have traditionally remained closed to international investors, with the complex compliance and regulatory infrastructure required representing a major stumbling block to potential growth. The solution? Integrating global custodians and transfer agents with fund administration into one seamless platform that transcends borders.
Progress towards this is already underway, but bridging the gap across the Atlantic remains the most significant challenge. Unlocking access to the global market is the real value driver in this respect. To date, RealBlocks remains the only platform that enables truly global distribution with clientele in North America, Asia, Latin America, Europe and the Middle East. iCapital follows closely behind with coverage of the North American, European and recently Asian markets, while CAIS emphasizes the U.S. market.
Broadening Access to Alternative Investments
These solutions enable funds to embrace not just foreign investors; it’s also easier for funds to work with smaller investors through intermediary channels using feeder funds.
Domestically, onshore feeder funds have significantly improved access to institutional funds, unlocking an entirely new investor segment. iCapital has seen success in this area by using feeder funds that they have purchased from wirehouses and other platforms. However, emerging technologies may bypass the need for feeder funds, etc., by eliminating the administrative burdens associated with allowing investors to invest in institutional funds directly. Digital issuance of shares of funds could potentially prove to be the missing puzzle piece as it dramatically simplifies the investor onboarding and subscription process.
Facilitating Secondary Transactions
While alternative asset classes have continued to grow in popularity, one factor that has continually dampened adoption is the limited liquidity that is available to investors. This isn’t just a quarterly or multi-year challenge: investments in some private equity funds can be locked up for ten years or more, and today’s secondaries providers may require drastic haircuts for the seller and transactions can often take months to complete.
Adopting a digital-first approach with efficient smart contracts offers the potential for a better solution for both fund managers and investors. Through secondary market capabilities enabled on platforms including RealBlocks, iCapital and Moonfare, funds unlock the discretion to offer investors secondary trading through a network of transfer agents and fund custodians, addressing liquidity issues and making alternative assets more accessible than ever. iCapital has partnered with Nasdaq Private Market (“NPM”) to create an integrated secondary marketplace for iCapital sponsored funds through the NPM platform, per a statement from iCapital.
RealBlocks has built its own dark pool environment for secondary transactions, allowing continuous offers and giving asset managers control over buyers and sellers, customized to their business requirements. Moonfare, on the other hand, offers a semi-annual digital secondary market that offers its members a chance to sell their Moonfare allocations to others on the platform.
Adapting to the Technological Shift
The need for the financial infrastructure around alternative investments to evolve has been clear for years now. The rapid development and adoption of new platforms promise an exciting future for the industry, but it’s down to individual investment fund managers to seize their future.
Funds that remain anchored to existing business methods and impose cumbersome, bureaucratic processes on prospective investors will struggle to grow or keep their assets. Meanwhile, forward-thinking investment managers that embrace the new, efficient technologies can position their funds for significantly rapid global growth from an increasingly diverse investor base.
That growth will be driven in part by new platforms like iCapital, CAIS and RealBlocks. These new technologies represent the connective tissue firms need to build an efficient, intuitive interface around their alternative investment infrastructure. There’s a role for every platform that brings value to the table: from boots-on-the-ground platforms like iCapital and CAIS to technology platforms like RealBlocks.
“We believe that RealBlocks is the bridge between the old world of legacy systems and the innovation of emerging technologies,” said Perrin Quarshie, founder and CEO of RealBlocks. “We’re making it easier for alternative investment managers to reinvent their customer experience and rapidly scale their assets under management.” The implications for leaders of customer facing functions is therefore huge, particularly those running voice of customer cycles.
In summary, the world’s leading financial institutions are swiftly adopting new-age digital technologies as the new standard operating procedure, and it’s easy to see why. These technologies have transformational applications, enabling lower cost, higher volume administration, and allowing firms to reallocate their people away from mundane administrative work towards more economically valuable activities. It will certainly be interesting, therefore, to observe the impact on the workplace in the coming 12 months.