The competition among the big alternative asset managers for retail investor flows is ramping up — and while this represents an opportunity to drive growth, it also carries new risks for alt managers and the financial system, Moody’s Ratings says.
In a new report, the rating agency said that as the fight for retail market share heats up, alt managers are expected to roll out new retail-focused partnerships and funds in the months ahead.
This push for retail investors comes as more institutional investors are reaching the limit of their ability to dedicate capital to alternative asset classes. And, at the same time, policymakers around the world are looking to facilitate increased capital formation, and companies are increasingly opting to stay private, rather than accepting the trade-offs involved with public listings.
“To facilitate growth, asset managers and their partners are innovating new structures to provide points of access for private wealth,” the report said. “Retail investor capital within private markets represents one of the biggest new growth frontiers in the industry.”
Yet this growing exposure to retail investors will also bring added risks, the report said.
“Rapid growth beyond the industry’s traditionally core institutional roots — and its general opacity relative to public markets — could exacerbate risks around liquidity, transparency and valuation, which could in turn test the industry’s reputation during times of stress,” it said.
For instance, retail investors typically have different liquidity demands than institutions.
“Unlike institutional investors, retail investors expect ready access to their cash,” it noted, and alt managers are bowing to this need by developing products that offer easier access to liquidity.
“But in volatile markets, retail investors may run for the exits, which would exacerbate liquidity needs and the risk of potential mismatches between a product’s available liquidity and what investors are expecting,” the report said.
At the same time, growing retail volumes will also entail added asset quality risks, Moody’s noted.
“As retail flows grow, managers will need to be agile in finding good quality assets. Deployment will become more difficult as more managers compete for limited asset supply. This may lead some managers to assume more risk by investing less prudently to capitalize on this new opportunity,” it said.
Additionally, alt managers may also face added reputational risk if their efforts to add retail market share entails weaker credit standards or risk management that results in losses — which can translate into legal, regulatory and compliance consequences too.
Potential concentration risk is another concern, the report said, as most of the retail growth involves a handful of the top alt managers.
“While these are large and highly sophisticated managers, they also represent an increasingly bigger part of the private markets. Last year six of the largest firms raised 59% of all fundraising in the private markets, nearly triple their share in 2019,” the report said.
During episodes of market stress these kinds of risks can have systemic implications too, Moody’s warned, when “stress spreads across multiple funds with similar strategies. In such a situation, there would be more limited liquidity access across the system — further hurting asset prices.”