Talk Your Book: Alt Goes Mainstream with Michael Sidgmore
Aug 24, 2024
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Michael Sidgmore, Partner and Co-Founder of Broadhaven Ventures, dives into the evolving world of alternative investments, highlighting their shift from institutional to individual accessibility. He discusses the rise of evergreen structure funds, allowing for better liquidity and compounding. The conversation touches on the impact of large firms like Blackstone and the competitive landscape between traditional banks and private credit. Sidgmore stresses the crucial need for financial advisors to educate clients on these investment opportunities and the complexities of private markets.
Alternative investments are becoming more accessible to retail investors, shifting from institutional exclusivity to widespread opportunities for wealth managers.
The performance landscape of private equity shows significant discrepancies, necessitating careful evaluation by investors due to the narrower returns among larger firms.
Evergreen fund structures are revolutionizing private equity participation, enhancing liquidity and simplifying investment processes for wealth managers and clients.
Deep dives
The Evolution of Alternative Investments
Alternative investments have transitioned from being primarily available to institutional investors, such as pensions and endowments, to becoming more accessible to individual wealth managers and retail investors. This shift is part of a broader trend where the total assets in the wealth channel, which is approximately $145 trillion, have seen minimal allocations to private markets, typically around 2-4 percent. In contrast, large institutions have significantly higher allocations, often seeing 20-30 percent dedicated to alternatives like private equity and real estate. The expanding infrastructure from platforms such as iCapital is driving this evolution, enabling wealth managers to offer similar opportunities to their clients as those historically available only to institutional investors.
Market Efficiency and Performance Disparity
Historically, alternative asset managers like Blackstone have evolved from niche private equity firms into multi-strategy platforms offering diverse investment options. This growth has led to a more efficient private market; however, discrepancies in performance remain, especially between top-quartile and bottom-quartile funds. The interquartile spread in private equity returns is narrower among larger firms compared to smaller, fragmented markets. The current data indicates a shift, emphasizing the need for investors to thoroughly evaluate performance across the landscape of private markets.
The Shift in Investment Strategy Perspectives
There’s a growing understanding of alternatives as part of an evolving asset allocation strategy that now spans public and private equities, leading to some firms re-evaluating their portfolios away from a traditional 60-40 split. The increase in private companies staying private for longer, alongside a concentrated public market dominated by a few large firms, has created a push for wealth managers to diversify their clients' portfolios with access to private markets. This diversification is viewed not just as a way to seek alpha but as a necessity to mitigate risks associated with public market concentration. Moreover, liquidity from alternative investments is becoming increasingly important, as products like evergreen funds offer more flexible capital access than traditional private equity funds.
Emerging Structures and Access to Capital
The introduction of evergreen fund structures allows investors to participate in private equity without the traditional limitations of closed-end funds, providing more liquidity and fewer complications during capital calls. These structures not only simplify investment for wealth managers but also pose advantages to GPs who can maintain longer-term investments without requiring forced exits. As competition among alternative asset managers intensifies, the emphasis will likely shift toward sustainability and efficiency, making the wealth channel a critical focus area for growth in alternative investments. By offering these innovative products, firms can accommodate a broader range of client needs and preferences in their investment strategies.
The Future Outlook for Private Markets
The private markets are expected to continue their growth trajectory, driven by both increased capital inflows and the evolving structures that enhance accessibility for investors. Although some view the influx of capital into private credit and alternatives as unsustainable, industry insights suggest that the market is far from saturated, with a wealth of opportunities remaining. The ability for large-scale alternative managers to outperform and innovate positions them favorably for future growth, while a focus on education within the advisor community will be crucial for navigating this complex space. Overall, both advisors and investors are likely to see increased allocation to private markets as they adapt to changing economic climates and investment landscapes.
On today's show, we are joined by Michael Sidgmore, Partner and Co-Founder of Broadhaven Ventures to discuss all things Alternatives, how that world has changed in recent years, why financial advisors in the RIA channel is such a big opportunity for alternative investments, and much more!
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