Alternative investment managers are increasingly tapping the private wealth segment — a development that is driving growth, but also brings added risk, says Fitch Ratings.
In a new report, the rating agency said that alt managers are venturing further into the private wealth channel, which will drive long-term growth in assets under management.
“Alt IMs have a substantial market opportunity within the expanding private wealth channel, which is estimated at more than US$10 trillion,” Fitch said.
For instance, Blackstone, which was one of the first alt managers to launch products targeting the private wealth market, now has about 23% of its assets in private wealth (more than US$270 billion in the first quarter), it noted.
“Large alt IMs with strong brand recognition and product diversity are best positioned to capitalize on this secular trend, because of the limited shelf space available with distribution partners,” Fitch said.
Additionally, alt managers and traditional managers are increasingly teaming up to create products for high-net-worth and retail investors, it noted.
“These collaborations have led to the creation of hybrid public-private market solutions, which combine traditional public investments with private assets offered by alt IMs,” it said.
At the same time, certain traditional fund managers are also expanding their product offerings to incorporate more private assets, it noted.
While private wealth represents a growth channel for alt managers, it also brings added risk, the report said.
“Over time, we anticipate these products will introduce increased reputational and regulatory risk due to the emphasis on retail investors,” it said.
Additionally, alt managers’ private wealth products typically provide greater liquidity than typical alt structures that lock up investor capital long term.
This sort of liquidity “could induce the forced selling of assets in a severe, prolonged market downturn,” the report noted. “This can potentially lead to a drag on returns or increased valuation risk.”
These kinds of products “will also introduce more fee volatility for alt managers as these vehicles scale, given they earn fees based on NAV and are subject to redemptions, which makes them less resilient to a downturn,” it said.