Although sales of nontraded real estate investment trusts are having another down year, alternative investments sold by financial advisors are climbing as clients look to diversity and yields in portfolios.
Through August, financial advisors had sold $76.6 billion of illiquid alternative investments, including nontraded REITs, nontraded business development companies, interval funds, and a variety of private placements, according to Robert A. Stanger & Co. Inc.
That matches total sales for such products in 2023, according to Stanger. And the retail alternative investment industry, which has seen a notable influx of institutional money managers over past decade, is on pace to raise more money than in 2022, when financial advisors sold clients $105 billion of alternative products.
“Fundraising in alternative investments through August has already surpassed the total raised in 2023 and we anticipate capital formation to exceed $115 billion dollars in 2024 as retail investors continue to seek alternatives generating higher yields,” said Kevin Shields, chairman of Robert A. Stanger.
Sales of nontraded REITs appear to have bottomed out in 2024, but after the Federal Reserve’s interest rate cut this month of 50 basis points, real estate and REIT investors may be getting some welcome news.
According to Stanger, sales of nontraded REITs have totaled $4.2 billion the first eight months of the year; that’s in contrast to hitting a high of more than $33 billion in 2022, the same year the Federal Reserve began to raise interest rates precipitously in an effort to cool down inflation.
“Right now doesn’t seem like the best time to move out of real estate,” said John Cox, CEO of Cox Capital Partners, which invests in non-traded alternatives in the secondary market via a proprietary fund. “We’re really watching to see how changes in interest rates hit the updates to net asset values in these investments. You would think interest rate cuts would cause sponsors to increase NAVs.”
Meanwhile, nontraded BDCs have supplanted REITs as the favored illiquid alternative investment sold by financial advisors.
BDCs work like banks and raise capital from investors to lend to small and mid-sized private companies. The closed-end companies invest primarily in debt and equity of private firms. Yields can be attractive because of the BDCs’ exposure to high credit risks amplified by leverage.
According to Stanger, financial advisors sold close to $23.7 billion of BDCs through the end of August, compared to $21.2 billion over 12 months last year.
Blackstone Inc. is the top money manager in nontraded REIT and BDC sales so far this year, according to Stanger.
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