Demand for alternative assets is on the rise as advisers seek alpha for their clients and interest from investors increases, panellists said at the Australian Wealth Management Summit on Friday.
Speaking on the panel, Praemium’s chief strategy officer, Denis Orrock, said that just over 11 per cent of total funds under administration (FUA) on the Praemium platform now comprises alternative investments.
“That’s grown about 20 to 25 per cent year on year over the last three years, so that continues to outpace other investment services,” Orrock said.
Head of distribution at Federation Asset Management and fellow panellist Cameron Farrar agreed, adding that he believes private credit to be one of the alternative asset classes best positioned for mass adoption in the coming years.
“The private credit market is very important for Australia, because a lot of banks have their lending profile as well. So there’s a mid-tier in the Australian market that needs to access funding,” Farrar said, noting the recent influx of fund managers in the space.
Orrock similarly highlighted how private market alternatives have already received significantly higher allocations in Asian, European and North American markets for some time.
Farrar also identified private equity as another alternative asset class of interest, largely due to its greater familiarity among Australian investors.
“All you’re really doing there is just changing the market from public to private and how you access it,” he said, adding that the public versus private market debate is somewhat irrelevant since public exposure is still vital.
He said increased interest in private markets is partly due to a generation of investors coming through whose wealth stems from their experience running businesses.
“So continuing to maintain an exposure inside their portfolio, albeit to a different company than their own original operating company, is important,” Farrar said.
Orrock agreed, adding that high-net-worth clients have traditionally had a higher “level of comfort” in alternative assets in the private space.
Farrar added that Federation has also seen increased interest from investors wanting to access sectors not available on public markets, specifically in the environmental, social, and governance investing space.
“There’s been a push in the private market space for people who want access to the assets that we own: wind farm developers, large utility scale batteries”, he said.
As the private market investment audience expands beyond these traditional high-net-worth investors, how best to democratise access has become a key question.
As Farrar explained, offering retail clients the same investment ideas as wholesale investors actually presents a win-win for fund managers, even with the additional regulatory requirements.
Using Federation as an example, he said that the vast majority of the nearly $3.5 billion in funds under management is currently institutional, while a wealth management channel underpins all operations and typically initiates the first investment – benefiting both. Despite the extra hoops involved in licensing the firm for retail investment, this model streamlines investment and simplifies administration in the long run.
Orrock added that from a wealth management platform perspective, the structure of private market products poses a significant challenge. However, the increasing prevalence of evergreen structures simplifies the process of onboarding and administering these new products.
He also noted the growing popularity of alternative investment exchange-traded funds, acknowledging the trade-off there since these funds trade in certain forms to facilitate liquidity. At the same time, as more liquidity windows become available for funds, secondary markets also emerge.
“And giving people exit or off ramps from some of those investments, it becomes easier to start to bring some of those assets on,” Orrock said.
Farrar highlighted that illiquidity restricts access to private markets for many. He added that a key structural change in Federation’s Alternative Investments 2, launched this year, compared to the 2018-launched Alternative Investments 1, was designed to enhance liquidity.
“So just in that seven years from when we first launched fund one versus fund two, we’ve made significant enhancements in terms of the structure of the product, which were really driven by fund one investors telling us, ‘Look, we prefer to be in charge of when we come and go for a fund’,” he said.
To address the trade-off between the higher returns of alternative investments and the liquidity of the public market, Farrar said Federation divests liquidity from the underlying portfolio and retains a cash reserve.
“People are happy for that cash drag to exist knowing that they’ve got the get out of jail card of being able to redeem so we keep a fair portion of cash,” he said.
Orrock stressed that consistent liquidity windows and thorough reporting from managers are essential for platforms to accurately price assets.
At the same time, Farrar recognised the challenge of opaqueness within the asset class, an issue that has recently attracted ASIC’s scrutiny.
Orrock agreed, adding that anything that can be defined as an alternative investment requires a lot of research from an adviser before it can safely be recommended to an investor.
“Investors who are investing unadvised into private credit: if it sounds too good to be true, it’s too good to be true,” he said.
