The Retailization of Alternatives: What it Means for Investors

Ultra-high-net-worth individuals, institutional investors and defined benefit pension plans have consistently hiked their exposure to private markets as evidence of their outperformance has grown. Yet this fast-growing asset class has remained largely off limits to retail investors. Seemingly, regulators are focused on retail access with concerns about alternative assets’ complexity and potential risks. Certainly, alternative assets can be more complicated than traditional portfolios. But industry collaboration could overcome these challenges, unlocking retail access to private markets that could help future retirees better fund their retirement.

Our new whitepaper discusses the drivers of the democratization of alternatives and how the industry is responding.  

Why Alternatives Investments? 

Diversification is at the heart of modern portfolio theory: portfolios that include uncorrelated returns can be more resilient and outperform undiversified portfolios over time.¹ Alternative investments, which potentially offer a variety of different return profiles, many of which are markedly different to listed securities, can help investors to achieve this goal and therefore may boost their investment or retirement returns.²

The benefits are not just theoretical. While private market investments, such as private equity and debt and real estate, have come under pressure as the interest rate environment has changed and public markets have declined, these alternative assets have had notable long-term performance. Based on market data, private equity investments outperformed public equities by more than nine percentage points on average for the five years ended March 2023.³ Private debt outperformed high yield debt by more than five percentage points for the same period. Moreover, challenging conditions could prove advantageous for future returns. 

Key Findings from the Report

• Timing investments in private markets: Private markets’ assets of all types are being repriced due to valuation and liquidity concerns. But this could prove potentially advantageous for future returns. Moreover, certain experts believe including alternatives in portfolios could reduce overall volatility and enhance yield stability at a time of market challenges and lower return expectations for traditional asset classes.

• The industry is eager to engage: Private market managers are seeking a new growth engine as the defined benefit plans that have been a mainstay of investment in recent decades start to decline. Retail investors are a growing force and DC plans are now predominant in most countries, making these investors ideal new sources of investment.

• Tentative change is underway in major markets: Developments in the United States suggest attitudes to retail investment in alternatives are starting to change. In other markets, change is more concrete. Alternative asset managers are working on funds using structures such as SICAV and ELTIF in the European Union and LTAF in the United Kingdom.

• Liquidity a top consideration for individual investors: Retail investors and DC plans favor the daily liquidity offered by public asset markets; alternative asset managers need to acknowledge their expectations. But illiquidity is one of the reasons why alternative assets outperform public markets. Retail investors need access to education so they can understand both the opportunities associated with alternatives, as well as the tradeoffs. Existing measures to manage liquidity in other markets, such as REITs (where there are limits on redemptions), suggest compromises will be achievable.

Working with the Right Partner

The retailization of alternatives is already underway and accelerating. Greater democratization of private equity, debt and other private markets offers compelling opportunities for retail investors and DC plans. Change will take time and requires managers, investors and service providers to listen to other parties and find ways to accommodate their requirements and overcome barriers.

The alternative asset ecosystem needs to work for all parties if it is to continue to grow and deliver benefits to a wider universe of investors. BNY, as a full-service organization, is committed to supporting this ecosystem, deploying its capabilities to help its clients globally.