In the latest episode of the Alternatives Allocations podcast series, I was joined by Patrick McGowan, Head of Alternative Investments, at Sanctuary Wealth Management. Patrick and I discussed advisor adoption, structural tradeoffs, due diligence and the increasing demand for alts. We discussed the importance of education focusing on the merits of the asset classes, and the tradeoffs from one product structure to the next. We compared investment structures: the traditional drawdown structure where capital is raised during a subscription period, and capital is called over time; and the perpetual structure (registered funds), where they are generally available, and capital is put to work as it is received.
As Patrick noted, registered funds (interval and tender-offer funds) are available to a broader group of investors, at lower minimums, and more flexible features. However, he also noted that certain strategies fit better into a drawdown structure as opportunities need to be sourced over time. The important thing is that advisors and investors understand the structural tradeoffs of the various options, and they determine which is most appropriate for their clients.
Structural Considerations
Source: “Interval Funds: Operational Challenges and the Industry’s Way Forward.” Interval Fund Tracker 2021. Investment Company Institute.
Patrick and I also delved into the importance of due diligence in evaluating funds. Patrick emphasized the importance of matching the objective of the fund with each client’s goals. He stressed the importance of understanding the underlying holdings, historical track record, and fees among other issues. Due diligence may be conducted by the home office, third-party providers, and/or by advisors themselves.
I asked Patrick where he saw the biggest opportunities in the coming year. He stated, “I do think that there is a lot of interest and there will be continued interest in managers in areas like direct lending and private credit and real estate lending. There are these huge opportunities, multi trillion-dollar opportunities for private lenders to get involved there.”
The bottom line is the alternative investment landscape is expanding dramatically, with more institutional-quality managers, bringing more products to the market across the array of strategies. Advisors should select the most appropriate options to fulfill their clients’ needs and goals.
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WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. Diversification does not guarantee a profit or protect against a loss.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price. Past performance does not guarantee future results.