Alt Investments
Biggest Fans Of Alternatives? Family Offices, UHNW Clients

Whatever questions arise about the increased noise around private markets – aka "alternatives" – the reality is that investors have shrinking choices in public, listed markets, which raises the need to find ways to get a piece of the business pie. This is the second part of an analysis of this area by our US correspondent.
Although a backlash may
be brewing as purveyors of alternative investments step up their
marketing assault on the retail market, family offices and the
UHNW market remain safe havens for the asset class, albeit with
considerable caution.
“We remain optimistic that private investing will deliver
outsized returns over public markets, although we are monitoring
the evolution of the space,” said Jack Ablin, chief investment
officer and founding partner of Chicago-based multi-family office
Cresset.
While alternatives account for an estimated 5 per cent allocation
in retail portfolios, a new survey released by BlackRock (which is heavily
pushing alternative products) shows alternatives making up 42 per
cent of assets in family office portfolios, up 3 per cent from a
similar survey two years ago.
At WE Family
Offices, where the “average family” has approximately $180
million under advisement at the firm, clients may have as much as
35 per cent of their portfolios allocated to alternatives,
including private investments and hedge funds, according to
managing partner Michael Zeuner. A general target allocation in
alternatives for Market Street Trust Company’s ultra-high net
worth families, who on average have nearly $50 million under
management at the firm, ranges from approximately 15 per cent to
20 per cent, said chief investment officer Marc Dizard.
While skepticism of alternatives has mounted as giant Wall Street
firms escalate their marketing campaigns to sell alternatives
into the retail and 401(k) retirement markets, family offices and
wealth managers catering to UHNW clients continue to add private
equity, private credit, hedge funds, venture capital and other
non-publicly traded vehicles.
Increasing allocation
Surveys by both UBS and
BNY Wealth found
that just over two-thirds of family offices plan to increase
allocation to private equity investments and funds, while around
30 per cent indicated that they would be increasing exposure to
private debt.
"There is a huge attraction to private assets because family
offices have a time horizon that's aligned," said Sinead Colton
Grant, chief investment officer for BNY Wealth. "They have the
ability to access and take advantage of that illiquidity
premium."
Alternative investments “make sense” for UHNW investors in light
of historical returns, low correlation to public market
investments, public market volatility and the illiquidity premium
investors receive for locking up their cash for time periods that
can last 10 years or more, said WE’s Zeuner.
Alternatives’ illiquidity premium has “reaped benefits for very
tenured clients,” said Market Street’s Dizard. “But the premium
isn’t just given to you. There must be the right fund and the
right manager.”
Wealth managers are paying increased attention to the investment
structure of alternatives, agreed Cresset’s Ablin, whose clients
have an estimated average of $20 million to $30 million under
management at the firm.
“As the biggest sponsors are partners with the wirehouses to
package illiquid assets into semi-liquid wrappers, dislocations
could occur from the liquidity mismatch,” he noted. “Massive
capital inflows into these new vehicles could create
price-insensitive buyers as sponsors struggle to get capital to
work. For those reasons, we prefer middle-market private
equity rather than mega-cap buyout.”
PE frustration
While private equity has remained a core investment for family
offices and UHNW investors, clients have become frustrated at the
lack of distributions, Zeuner said. “Net asset value is not
keeping up with public markets,” he explained. “It’s hard to stay
committed.”
Market Street’s Dizard similarly noted that investors may have to
get used to receiving a lower premium from private investments
compared with public markets. “As private markets have grown and
more capital is chasing the same returns,” he said, “investors
will be asking is the opportunity cost still worth it?”
Family offices surveyed by BlackRock also complained that private
equity comes with middling valuations, a lack of transparency and
delays in returning capital. Nearly 75 per cent of family offices
said private market fees are too high.
Private credit’s turn
Not coincidentally, private credit has emerged as one of the
hottest – and
most hyped – sectors in the alternatives market. Private
credit loans have grown at an average annual rate of over 20 per
cent over the last five years and now account for 7 per cent of
the credit to non-financial corporations in Noth America,
according to the International Monetary Fund.
UHNW clients are increasingly attracted to private credit’s
potential to diversify portfolios and the potential of higher
yield than in public bond markets, and private credit now
accounts for 15 per cent to 30 per cent of some family office’s
portfolios, according to the BlackRock report.
By all indications, private credit will be a “broader, larger and
a core part of a private client portfolio” going forward, Alona
Gornick managing director and senior investment strategist for
Churchill
Asset Management, told Family Wealth Report.
But the IMF has warned that the rapid growth of private credit
may lead to a deterioration in pricing as well as weakened deal
terms, including lower underwriting standards and weakened
covenants, raising the risk of credit losses in the future.
New reality
Due diligence and access to top quartile funds will be key to
success in the alternatives market going forward, industry
executives said.
“The concern is that the market may be bifurcated,” said Dizard.
“Investors may think they are accessing one part of the market
when actually they are accessing something different.”
While some investors “may get out over their skis” when making
alternative investments, Zeuner noted, they need to focus on the
“the right general partner who can offer value added. It’s
important to stay committed and not throw the baby out with the
bath water.”
Even putting potentially higher yields aside, the reality is that
options in the public markets are shrinking. The listed equity
market has been contracting significantly for two decades, as
companies are increasingly staying private.
Industry observers note that the alternative sector has not been
through a major recession. When done right however, privately
owned firms, depending on their alignment of incentives, can be
among the most resilient, as demonstrated by several German firms
that have been the backbone of that country's impressive post-war
economic success.
As Marc Rowan, CEO of asset management giant Apollo Global
Management said at last week’s Morningstar Investment
Conference, “Why are we so pig-headed to think the products of
today will exist in their current form for the next 20 years?”