Digital marketplaces aim to ease RIA access to alternative investments

New platforms provide a curated menu of products like private equity, private credit, venture capital, real estate and hedge funds

Dec 22, 2017 @ 12:00 pm

By Ryan W. Neal

Advisers are expected to increase their use of alternative investments in 2018, and technology vendors are eager to meet the demand.

Companies like iCapital Network and CAIS are providing digital marketplaces to help providers get products like private equity, private credit, venture capital, real estate and hedge funds in front of advisers, and make it easier for advisers to invest in them.

CAIS, which launched in 2009 to give independent advisers access to alternative investment products that were traditionally only available to wirehouses, now services more than $5 billion in assets.

Frederick Kauber, CAIS's managing director, chief technology officer and chief marketing officer, said many people just aren't educated on what alternative investments are or what is available. Providing a curated menu of products (CAIS uses funds rated highly by Mercer, iCapital uses investments chosen by their in-house team) is generating greater interest among advisers and clients, Mr. Kauber said.

"One of the main drivers [of growth] that we've found is just generating awareness within the wealth management community," Mr. Kauber said.

On December 15, iCapital announced it completed the acquisition of the U.S. private-equity access fund platform from Deutsche Bank's asset management division. The deal brings 53 onshore and offshore investment products and $2.8 billion in capital to iCapital's platform, bringing the total to $5 billion.

Obstacles to bringing RIAs into the alternative-investments fold are evident. Mr. Kauber said investing in the asset class is a cumbersome, labor-intensive process that requires a lot of paperwork and increased compliance risk.

David Lee, the founder of Mach 1 Financial, an RIA with $92 million in assets under management, confirmed this is often the case. Mr. Lee does offer clients some alternative assets, but has avoided many — particularly private equity — because of the high hurdles and liabilities involved.

"It's just something I've steered away from," Mr. Lee said. He hasn't tried the technology options on the market, but said something that streamlines the process "would be very valuable from my perspective as an investment adviser."

Products like CAIS and iCapital are trying to do this with technology. Advisers can use the platform to search and review alternatives. Digital forms pre-populated with a lot of the required information save time and minimize mistakes, and integrations with advisers' custodian and technology platforms simplify the investing and reporting processes.

The technology also is proving beneficial to the product providers.

"Product providers were struggling with how to work with the independent channel because it's so fragmented," Mr. Kauber said.

Digital platforms like CAIS and iCapital can aggregate assets across multiple wealth managers, helping the funds raise more assets.

The side effect is a reduced cost of entry. If an adviser goes directly to the fund provider, the minimum investment can be $1 million or more. Digital platforms like CAIS and iCapital can aggregate assets across multiple wealth managers and investors, reducing the minimums to as low as $100,000.

The larger financial institutions are taking notice. Over the last year, iCapital raised $50 million from an investment group led by BlackRock that also includes UBS Financial Services and Morgan Stanley.

iCapital CEO Lawrence Calcano said that while these firms aren't lacking access to the alternative products, they are looking to iCapital's technology to improve how advisers access them.

"Our strategic partners have made minority investments in iCapital, and the firms ... leverage iCapital's technology to improve their alternative investments infrastructure and help streamline the process of allocating to private equity and hedge funds for advisers and their high-net-worth clients," Mr. Calcano said.

Lauren Bellmare, a Morgan Stanley spokesperson, said the company sees a significant opportunity to expand Morgan Stanley Investment Management's use of alternatives in the high-net-worth space, and called iCapital's technology "transformative" for removing many of the roadblocks that prevent advisers from getting more involved.

BlackRock decline to comment on their investment in iCapital; UBS did not respond to requests for comment.

(More: RIAs leaning toward alternative investments in 2018)

Also, over the last year, Mercury Capital Advisors, a placement agent that has raised $160 billion since 2003, quietly launched a digital platform for its strategies called iFunds. Mercury has raised $25 million in its first year and plans for a more public launch in January 2018.

Advisers can use the iFunds platform to invest directly for no fee if they meet certain minimums. If not, iFunds charges a 50 basis point fee. Donal Mastrangelo, Mercury's head of iFunds U.S. distribution, said this lets all RIAs access alternatives, whether they have a few very large clients or many smaller clients.

CAIS is complimentary to advisers, and the company generates revenue through partnerships with the asset managers on the platform.

iCapital's platform is free for advisers to browse and research products, but does charge a management fee once an investment is made. The company also generates revenue by providing white-label version of its software to advisory firms.

"Our open-architecture structure allows our in-house diligence team to review the entire marketplace when considering products to offer to our network, as we do not take fees from the investment manager," Mr. Calcano said.


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