How can alternative fund managers shape new horizons of opportunity?

Achieving sustainable growth from new investor segments will require significant changes to many current business models.

In brief

• Alternative fund managers view individual investors as a leading strategic priority for growth.
• New investors will bring new challenges, and firms face obstacles including liquidity, suitability, education – and profitability.
• To succeed, firms will require robust strategies for growth that align trust, transparency, technology and talent around a revised set of capabilities.

In their ongoing search for new sources of capital, alternative fund managers around the world and especially in North America have identified individual investors such as retail/mass market, high net worth (HNW) and ultra high net worth (UHNW) as the next big growth market and a leading priority for the coming three years.

That’s one of the key takeaways from the 2024 EY Global Alternative Fund Survey (pdf), which also examines major strategic themes such as product or fund diversification, the optimization of technology and the rollout and development of artificial intelligence (AI) powered innovation, and forward-looking concerns of both fund managers and institutional investors.

The 2024 EY Global Alternative Fund Survey (pdf) is the latest edition of our flagship pulse check of more than 400 alternative fund managers and institutional investors. The majority of firms surveyed are actively looking for new types of investors to fuel growth. This push is particularly marked among private equity general partners – many of whom have seen their fundraising abilities constrained in recent years by higher interest rates, slower than expected recycling of capital, and subdued M&A and IPO activity.

New investors bring new challenges. Our research shows alternative fund managers are alert to the potential risks of broader engagement with individual investors, including:

• Liquidity – 48% of managers are worried about managing liquidity expectations.
• Transparency – the availability of data for risk monitoring and performance reporting is managers’ second greatest worry.
• Nomenclature – firms are concerned about a lack of standard parameters and definitions for alternative investments.
• Suitability – the organizational culture and norms of alternatives management and wealth advice are very different, with significant scope for miscommunication.

Managers’ concerns vary significantly between markets. Liquidity is the most acute concern in North America, where semi-liquid investment vehicles are more common. Firms in Europe view data availability and the lack of standardized infrastructure as by far their greatest concerns, while those in Asia-Pacific see data availability as a relatively big risk.

If there’s one theme that underpins all these responses, it’s the need for enhanced education. Ensuring that investors have a deep and nuanced understanding of the investments they’re making – including behavior, risks, and the range of potential outcomes should be the most important goal for firms seeking growth from individual investors. The need for education encompasses financial advisors, too.

Then there’s the biggest question of all – profitability. Addressing the potential risks of liquidity and suitability will add to the cost and complexity of alternative managers’ operations. Individual investors, drawing on their experiences with traditional asset managers and self-directed accounts, will typically expect frictionless onboarding, real-time reporting, and access to experts as a matter of course.

So what will it take for firms to attract new investors – and will the returns be worth it?

Of course, individual investors are far from new to alternatives investing, although most markets lag the US in terms of accessibility. But large-scale expansion will take many alternative managers, investors, and advisors into unfamiliar waters.

Serving more investors with higher service expectations, via a greater range of channels and intermediaries, will require firms to deliver a far wider range of customer journeys — as well as incurring additional costs such as placement agent fees. Firms will need to adjust their operating models accordingly.

Changes to systems, processes, training and culture will be required. While investment performance will always be essential, managers should also consider their ability to delivery holistic experiences that meet the needs of the new investor types they are targeting. As a starting point, firms should examine their capabilities and align themselves to the four essential T’s for growth:

• Trust – building investor trust will require firms to deliver openness, clarity, appropriate products, careful guidance on suitability and effective real-time reporting. Honing the focus on brand value and culture, and communicating that to clients, will go a long way in building trust and appeal.
• Transparency – the ability to provide clear and effective communication will depend on firms’ enabling infrastructure, including joined-up technology and data platforms.
• Technology – providing high-quality experiences that meet the expectations of investors and regulators will rest on robust technology frameworks, including the optimal use of AI.
• Talent – upskilling staff with timely education around alternative investment products as well as empowering them with the right technology tools will go a long way. Investors continue to value personal service, making investor relations personnel with a combination of product knowledge and advisory skills more valuable than ever.

Alternative fund managers should set themselves targeted goals that will lay the ground for success with individual investors, such as:

• Be prepared to invest significant time and resources.
• Ensure the four T’s of trust, transparency, technology and talent are aligned around a strategy for individual investors.
• Put appropriate distribution channels, such as partnerships with investment platforms or financial advisors, in place.
• Assess and bolster the ability to deliver high quality investor communication, including complaints handling.
• Ensure full compliance with relevant conduct and product regulation and anticipate additional supervisory scrutiny in key areas such as value for money.
• Formulate a strategic blueprint for collaboration or consolidation with wealth managers and other potential partners.

Without the commitment of sufficient effort and capital, then no matter the strength of demand or investment returns, many firms will struggle to achieve sustainable, profitable growth from individual investors.

Jesse Krupski, Partner and Adam Gahagan, Senior Manager, Wealth and Asset Management, contributed to this article.