Besides liquidity problems, advisors also face the twin challenges of due diligence and regulatory hurdles when they want to put clients in private investments or loans. And that’s where a new breed of fintech firms have emerged. Atlanta-based Gridline is a recent entrant in the growing field, aiming to “provide access to top quality professionally managed funds,” says CEO Logan Henderson. “We also wanted to streamline the back-office process, creating an experience similar to what online brokers offer,” he adds. Gridline’s platform provides a “self-directed process for advisors,” adds Henderson, enabling them to test-drive the options themselves, though a salesperson is also available for a teach-in if needed.
Many top-performing alternative funds were previously inaccessible for advisors and their clients because of the high minimum buy-in requirements. Gridline’s “fund of funds” offerings start as low as $100,000. That’s perhaps too high a hurdle for many clients, especially as such investments should never account for more than 5% or 10% of a portfolio. But it’s more feasible for wealthy clients and others who qualify as accredited investors.
Investors in this space who focus on best-of-breed managers with long track records will get better returns than they would in public markets, Henderson notes. “The top quartile has delivered an [internal rate of return] in excess of 30%,” he says.
Thais Gaspar, a global alternatives strategist at Brainvest, notes that her firm offers alternatives access in areas such as private credit, mezzanine loans and venture capital. The firm invests on behalf of its clients and is not an “alts fintech platform” like firms such as Gridline or CAIS.
The firm’s value add is instead in finding the most appealing investments from a risk/return perspective. “We’ve been especially focused on private credit and are increasing our exposure to it. Such investments are higher up in the capital stack, which gives us better protection against defaults,” she says.
Gaspar adds that her firm’s private credit investments tend to focus on opportunities with shorter duration, often 12 to 36 months. “This can be an even shorter time frame than equity holding periods,” she notes. Still, any such private investments will always lack the liquidity of their public counterparts. Gaspar says investors are still getting suitably compensated with excess returns for the illiquidity discount.
Notably, shorter-term private loans are often tied to variable benchmark interest rates, a key consideration when such rates are on the rise. However, Gaspar adds that there can be a six-month time lag before higher rates filter into private credit loans.
On the equity side, Gaspar says that VC funds currently hold greater appeal than private equity funds. “PE funds may be more likely to suffer from downward revisions in valuations,” she says. Also, venture capital fund managers have a clearer exit path than PE funds in today’s environment, the strategist notes. Still, as an alts investor will tell you, “manager selection is crucial,” stresses Gaspar, adding that “vintage diversification” is another consideration, since investors don’t want to be overly concentrated in a specific period of maturities.
Gaspar has noticed a change in the makeup of today’s alternatives investor cohort. “The alternatives investor base used to be more institutional, but now we are seeing more family offices like Brainvest and high-net-worth investors express interest in the search for better risks/rewards in their investments,” she concludes.
It’s growing harder to neatly sum up the alternatives landscape. The publicly traded liquid alt funds are purpose-built for volatile markets and smoother returns, while the private markets are emerging as a distinct opportunity in their own right. There is likely room for both of these categories in your clients’ portfolios.
David Sterman is a journalist and registered investment advisor. He runs Huguenot Financial Planning, a New Paltz, N.Y.-based fee-only financial planning firm.