Inside iCapital’s $497 million in fresh funding

Once the domain of the ultra-rich, alts are now the investment du jour of wealth managers as entry minimums come down, and placements open up for a larger number of accredited investors.   

Sales of alternative investments, like nontraded real estate investment trusts and business development companies, skyrocketed in the first half of last year. Rare whiskies, classic cars and even handbags have seen their values increase over 100% in the past decade, according to a survey by the investing firm KKR & Co. Inc.

iCapital Network Inc., an alternative investment provider for wealth managers, has seized the opportunity by landing almost half a billion dollars in two funding rounds last year and is hoping to ride the alt wave well into 2022. 

“We’re seeing a strong gravitation to these types of assets,” said CEO Lawrence Calcano. 

As the number of publicly traded companies steadily declined over the past decade, interest in the private markets has exploded. “The number of investment opportunities in the public market is just swamped by what’s available right now in private markets,” he said.

The New York City-based company increased assets on the platform to more than $104 billion, and grew its headcount to more than 720 employees last year. Armed with a new war chest of cash, iCapital acquired Axio Financial, a distributor of structured notes, and entered into a partnership with the digital currency asset manager Grayscale to offer cryptocurrency to advisers in September.

Steve Houston, iCapital’s head of fund management and research, said the growing appetite is driven by historically low interest rates and the need for advisers to seek out higher yields for clients. “There’s a desire to diversify traditional asset-allocated portfolios that typically hold taxable fixed income and public equity,” he said.

The company’s secret could be its ability to combine multiple high-net-worth investors into a single private placement. By automating much of the subscription process, investors can pool their money together, thereby bringing down the minimum for everyone and gaining access to otherwise unattainable investments. 

“Historically, these investments have been the purview of institutions both because of the high minimums and there’s a lot of operational costs,” Calcano said. “Even investors with $5 or $10 million — that we would consider to be wealthy — can’t make that kind of commitment. When the minimums come down, clients can invest in a way that makes sense for their portfolio size and composition.”

Founded in 2013, iCapital Network Inc. facilitates access to private markets for advisers’ high-net-worth clients and has gained significant interest from private equity investors. The company landed an impressive $447 million in July and tacked on another $50 million in December when additional investors wanted in. The company has a valuation of more than $6 billion. 

“It's the story of the whale and the minnows,” said William Trout, director of wealth management at the consulting firm Javelin. “The minnows being everybody else.”

A reason for the increased interest in iCapital is tied to the explosion of the alts market. Advisers holding between 5% to 10% of holdings in alternatives are expected to nearly double the size of their investments over the next two years, according to a forthcoming research paper from Javelin.

Advisers are desperate for new ways of generating alpha and diversifying their high-net-worth client portfolios, said Craig Iskowitz, founder and CEO of the Ezra Group. “The post-Financial Crisis bull market is fading, [along with] two-plus decades of low interest rates.”

Many of the top custodians serving independent advisers are now reporting doubling and tripling of assets in alternative investments, he added.

In fact, the independent channel could prove one of the biggest opportunities for iCapital and its competitors. One of the major obstacles, however, is the complex subscription processes necessary to get clients signed up for private investments. 

“The private market is the Wild West for advisers,” Trout said. “There’s just huge friction in terms of the efficiency and the ability to capture all this information, and to communicate it onward.”

Due diligence is the first challenge for advisers who have to ensure private investments are appropriate for clients. Then comes communication back and forth with lawyers, fund sponsors and custodians, and signing and emailing documents. In many cases, documents are still being hand-delivered using mail carriers, like FedEx Corp. or United Parcel Service Inc., Trout said.

It’s something that alt providers will have to solve to continue the segment's sustained growth. While iCapital, and a host of robotic process automation fintechs, is tackling document management, data gathering and compliance needs, more will have to be done to get full adoption from the independent channel.

And not many companies are offering products that can simplify the entire process, Trout said. “The RIA market is where the action is moving forward,” he said.

Still, assets under management in the alternative investment space are projected to top $17.2 trillion by 2025, according to the research from KKR. 

For Calcano, the main objective isn't about pulling in additional assets, but getting advisers informed about private placement options and making sure the end investor has the right information available to make informed decisions. 

“I’d rather see the market grow more slowly and people take the extra time and get the extra education as opposed to just jumping in — reflexively and reactively,” he said. “Thoughtful advisers and investors are better for the profession than people storming in through the closest entrance.”