“They actually have very low allocations to public markets because the public markets are inefficient and, at this point in time, a bit expensive,” Davidow explained. He cautioned that he does not advocate advisors imitate institutions, but getting their clients closer to the 10% allocation that a Cerulli study indicated was optimal, as opposed to the 2% current reality, would be a reasonable objective.
The biggest challenge, he said, is finding the right private market managers, because the difference between the best and the worst managers in global equities is just 300 basis points, whereas in global private equity it’s 2000 basis points.
“What’s really nice about it is you’re now in a position where you can access Blackstone, KKR, Hamilton Lane, and other world class managers,” he said. “These aren’t just people trying it out. These are people who have been running money this way for quite some time.”
Advisors should follow a common-sense checklist, he said, when looking at alternative investments for clients:
- What type of fund is being considered (qualified purchaser, feeder fund, registered fund)?
- What investor qualifications are necessary to invest?
- How does the structure match the goals of the investment?
- What are the underlying investments (private equity, private credit, real assets, etc.)?
- What are the liquidity features? Do they match the investor’s time horizon?
- What are the tax implications? What is the tax reporting?
For example, while interval funds and tender-offer funds seem very similar, including a typical $25,000 minimum investment, there is one very important distinction, and that is that interval funds provide liquidity quarterly, while tender-offer funds provide liquidity quarterly at the discretion of the board.
“I would argue these two structures have helped democratize alternative investments, and in a much better structure than first-generation liquid alternatives,” he said. “Interval funds have changed over time to reflect these opportunities. Prior to 2008, they mainly were bank-loan structures with very expensive fees. And now what we see are the underlying strategies have gravitated to private markets because of the illiquidity built into them.”
Because of the illiquid nature of alternative investments, advisors should not expect to be rebalancing a private market portfolio, or making tactical calls within it. But other than that, Davidow said, advisors should follow the same process they use for allocation and monitoring throughout a client’s portfolio.