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Hunting For The Best Seats At The Alternative Investments Table

Tom Burroughes, Group Editor , 6 November 2018

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Improving how private clients gain access to alternative investments and other areas once considered above their level remains an important recent trend. This publication interviewed a prominent player in this space.

(An earlier version of this item appeared on Family Wealth Report, a sister news service for this one. Mercury operates in multiple locations, so it is appropriate to share this with readers in other parts of the world.)

There are a few businesses now connecting private investors to alternative asset class areas, with some seeing their function as “democratising” market access. For some time now, it has been argued that areas such as private equity and hedge funds, for example, have been monopolised by large institutional players, such as pension funds, life insurers, investment banks and sovereign wealth funds. Even large family offices, so it has been said, have struggled to get a seat at the table during the boom years, although that may have changed when money-raising roadshows have become more arduous. With an estimated $1 trillion-plus of “dry powder” in private equity alone, firms are having to be more expansive about who they invite on board.

The analytics and research house Cerulli Associates recently noted that “the availability of tech-driven platforms, such as iCapital Network, CAIS, and Artivest, is easing access to alternative investments for high-end financial advisors”. In its report The Cerulli Edge - US Monthly Product Trends Edition, Cerulli continued: “The retail market has seen the entry of private equity giants, such as Blackstone, KKR, and Carlyle. The availability of brand-name private managers will help to fuel retail interest in alternatives.”

One organisation well known to Family Wealth Report, and a bit of trailblazer in changing how investors participate in sectors such as private equity, is Mercury Capital Advisors, based in New York and now with an office network spanning the globe. It argues that there are significant differences between what it is doing and some of the other players in the field, but it also recognises certain common features too. With the nature of how investors execute their ideas changing all the time, it is clear that wealth industry professionals need to stay ahead of the game.

FWR recently interviewed Ford Smith, executive director - iFunds distribution at Mercury, to explore some of the trends. Ford is also a member of this publication’s editorial advisory board.

There are a few businesses out there putting alternative investments (private equity, forms or real estate/infrastructure and other) onto “platforms” of some kind, saying these are designed to make it easier for private investors to get involved. What’s your general take on how this market is evolving?
Broadly speaking private wealth is generally under-allocated to longer lock-up vehicles, such as you described above. The private wealth allocation to alternatives seems to be increasing and has been confirmed by various consultants. Many GPs [general partners] now see private wealth as being open to these asset classes, but also realise that most investments will be relatively modest in size, especially in the early stages. The platforms make it easier for small investors to [carry out due] diligence, and then invest with, certain managers, and also enable the GPs to diversify their investor base.

Mercury’s own iFunds platform offers authorised investors access to a suite of curated alternative investments. How does this differ from what else is out there (such as the amount of care of assets involved, oversight, etc)?
The Mercury team has been raising capital for 15 years and has been responsible for over $170 billion in total capital commitments. Our job is to identify world-class managers, hence the success above, and our 18-person origination team conducts 350-400 manager meetings annually.  We are highly vested in the GPs with whom we work and conduct our own diligence/research, not a task that we delegate elsewhere. It is not uncommon for us to start doing due diligence on a manager and then conclude that it is not a good fit; we are not just a platform for hire. 

We have seen some examples (iCapital and HSBC, for example) coming together – do you see more arrangements such as these and how is Mercury positioning itself in terms of working with other financial institutions?
iCapital is intent on democratising alternatives by providing the access and administration/plumbing for smaller investors, but we remain focused on the more affluent Qualified Purchaser investments.  We agree that this is a very nice service and more firms may desire this access for clients. Furthermore, there is little doubt that general access is nice, but we believe that the ability to invest with world-class alternatives managers is priceless. 

For lack of a better analogy, when someone is starving, any food is vital, but most investors would prefer something other than just any food. When markets turn difficult that distinction will be all the more important. We also believe that larger financial institutions will work with more than one alternatives platform, for the same reason that major institutions speak to a variety of potential investment sources. Mercury is in discussions with several firms about strengthening the ties between our firms. Ultimately Mercury is more concerned with investors who seek differentiated world-class managers than advisors who seek to market to the masses.  

A big issue in wealth management is that even for large entities such as family offices, they can struggle to get a good seat at the table when it comes to investments. Do you see this still as an issue for the industry? How would you say your firm, and those that have some similar features, are changing this?
There are some GPs who still see their investors as defined as large institutions only, but more of them are intent on broadening and diversifying the investment base.  However, the business model economics are still focused on large LP [limited partner] commitments, and managers are not particularly sure how to access the sub-$25 million single investment. Many GPs are eager to diversify their investor base and want to identify partners who can improve the economics associated with broader base of LPs. 

If you are talking to a family office, private bank or other wealth management entity, what do you think are the main issues they should be thinking about when firms are road-showing new offerings, such as a private equity fund? 
When most advisors [family office, private bank, etc.] are diligencing a potential manager they want to complete their efforts in a thorough and comprehensive manner. Ideally this includes gathering all relevant materials in one location, so the advisor can review all information in a comprehensive and systematic fashion. That is why managers create data rooms for capital raising, and it’s also why some of the platforms are essentially collections of data rooms. While an investor may always pose unique questions, they want to begin their diligence efforts with a complete package of relevant information.  One would expect an alternatives platform would routinely include some standard pieces of information so that investors can complete as much of the standard diligence process before developing their own specific requirements.  

Mercury does a lot with its educational features of its site (videos, contributed content, etc) – is this an area that you still think is under-exploited in the industry? 
Yes, we believe there is a wide range of knowledge/experience about alternatives, and as a relatively new asset class for some private wealth investors, this is particularly true. Even those advisors who are quite experienced with alternatives are likely to have clients who are less experienced in this area and the availability of educational features can be quite useful. The educational materials are available in various formats [research, contributed content, videos] so that materials can be used to introduce an asset class, as well as enable investors to learn more about specific topics.

As far as the kind of investments/funds that are coming to market and which are being curated on your platform, do you see any noticeable trends? (We get a lot of noise in the PR industry about environmental, social and governance funds, but how much of this is really out there?)
We see three areas that continue to draw investor interest:  non-correlated strategies, income producing funds and ESG-focused efforts [environmental, social and governance-related investment ideas]. Even with some recent volatility, the markets have gone up rather steadily for some time and investors are trying to find ways to remain invested, albeit with a somewhat more defensive approach, designed to reduce direct market exposure. This actually links with the second trend as income producing strategies [especially as rates move higher] are definitely getting attention and make most strategies more defensive.  

There is a lot of talk about ESG and many managers are trying to build funds that include ESG facets, but it is hard to measure this trend accurately. Most firms raise their hands with new ESG dollars, but I suspect that there is a fair amount of packaging involved. 

When it comes to these sorts of platforms and business, how important is it in your view that those who run them have investment banking experience, private equity investment experience, etc? 
You’re asking a leading question and I’ll be as objective as possible. The alternatives platforms are essentially working to answer two rather different needs. From a pure administrative perspective the platforms provide a way for smaller investors to access managers that are usually not available to them, while enabling the managers to diversify their funding base. Assuming a proper roadmap [legal and admin] to follow this administrative function does not need particularly high-level financial experience.  

In a more challenging market environment the quality of managers will be more of a point of differentiation, and then access is not just an administrative issue. The experience of thousands of manager meetings, plus thousands of meetings with sophisticated investors, is an important point of distinction and helps to distinguish the world-class managers. Even if all platforms had the exact same admin/access features, and broadly similar managers, we believe that investors would be well served to use more than one platform. Because all platforms, and features, are not identical the need to use more than one platform is the smart business approach.

What would you say has been the most important change to how this business that you are in now operates – is it disintermediation of traditional players, the impact of the internet and modern communication technology, other?
From Mercury’s perspective our job today remains relatively the same that it has been for 15+ years.  Our job is to identify world-class managers and then work with those managers to raise capital for their funds. The impact of the internet and modern communications technology facilitates the disintermediation of traditional players, which is really the big story here. The very large bank/wire-houses have a significant fixed cost base that needs to be addressed. This cost base is why advisors are leaving for independent firms, and why a boutique firm like Mercury, or one of the other platforms, can provide value to investors. Without a large cost base intermediary firms can provide specialised services at better prices.      

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