Steve Peacher: Hi everybody. Steve Peacher President of SLC Management. Thank you for dialing in today. I'm really happy to be joined by Michael Schnitman. Michael is a senior vice president here at SLC and has been brought on to drive our foray and the high net worth. But Michael and I were we're colleagues years ago, so it's fun to be back working together. So, Michael, thank you for taking a few minutes.
Michael Schnitman: Great to be here.
Steve Peacher: So that's what we want to talk about is the high net worth market, and in particular the demand for alternatives in the high net worth market. And I think the place to start is with institutional investors cause they've really driven this trend. So I know there's a recent study, I think by Fidelity that pointed out that nearly 90% of institutions, institutional investors, pension funds, etc., allocate a portion of their portfolio to alternatives. And on average, the their allocation is 23%. But when you look at financial advisors who advise individuals and high net worth in investors only about 30% of advisors use alternatives.[1] So why is that? You know why have institutions been so interested? And then why is the penetration among financial advisors and retail investors not nearly what it is on the institutional side?
Michael Schnitman: Well, it has to do with manager access and manager selection and retail advisors are relatively new to private markets. And so they're just learning who the managers are. They're learning how to select them. They're learning how to access them. There are also perceived costs in private markets. And then there are liquidity considerations which are top of mind for any advisor and his or her clients. And so with private markets like private equity or private infrastructure, private credit, those are investments in illiquid type securities and therefore the ability to have the same profile that retail advisors and investors are used to of daily liquidity in a mutual funder in ETF is not germane. And so that can be a challenge as you think about allocating throughout the advisor's portfolio. And of course, high investment minimums, because with private markets you can have investment minimums running $10 million dollars or higher and obviously retail investors, generally speaking, don't have that amount of money to put into just one investment. And so over the past several years there have been significant innovations in structure that is germane to what a retail advisor and investor would want. You've seen the growth in interval funds, non-traded BDC’s and other vehicles like tender offer funds to bring true institutional quality, private markets asset classes to high net worth retail investors. But that's just beginning over the last handful of years and all of the complexities around understanding those structures and the asset classes are what have been holding back retail growth as compared to institutional growth which has been around for decades.
Steve Peacher: You know you mentioned a couple of the constraints that people need to consider, retail investors need to consider when it comes to alternative investments, and they're not for everybody. In general they should be you know, pursued by what you think of as a high net worth investor, somebody who can has enough money to have a sizeable portfolio, a broadly diversified portfolio. But for that investor class, for high-net-worth investors, what are some of the reasons why they would seriously consider adding alternatives to their investment mix?
Michael Schnitman: Well, improved diversification is a big one. If you look at the number of publicly traded companies that exist in North America, as an example, versus the number of privately held companies in North America, only 2% of the companies with revenues of greater than $10 million dollars are actually publicly traded. So, if you're not availing yourself of access to private markets investments, you're missing 98% of the opportunities that exist in either private credit, private infrastructure, or private equity.[2] So, opportunity set through diversification is number one. Number two, enhancement of risk adjusted returns, and the volatility profile of private markets. The illiquidity premium that's germane to private markets can help with elevating returns and also can smooth some of the volatility patterns, and so adding a dose of private markets to a retail investors’ existing 60/40 portfolio can help with the overall efficient frontier. It can help with the stability.[3] And the private markets connect as an important ballast. Also, another really important thing to note is that retail investors haven't had the same access to private markets as people's ancestors did. So in the early 1900’s, mid 1900s, and even up until the 1980s, many, many employees worked at companies for their entire careers, had DB pans, and those DB plans have always had access to private markets and non-traditional components. And indeed, in the last 20 years those DB plans have expanded the allocation of private markets and non-traditional investments.[4] Yet at the same time the shift in responsibility for retirement savings has moved from the corporate DB plan to the individual employee or participant and those employees and participants haven't had access to alternative investments and private markets. And so there's been this missing middle or a gap that doesn't exist for retail investors. And that's why it's really important for retail investors to start adding private markets so that they can get back the exposures that their parents did have and their grandparents had when they were members of DB plans.[5] And as we think about the challenge of the number of years that people need to save for in the re-accumulation process.
Steve Peacher: I think you make a really interesting point in that, despite all the innovations in finance and investments as you're pointing out to some extent at the individual level as people save for retirement they've taken a step back in terms of their exposure, because, and they don't even know it, because for years, as you say, it would have been a pension plan exposed to all these asset classes which haven't been available in things like 401K plans. So I think it's a really good point. Most people wouldn't appreciate that. So given, this is certainly becoming more prominent. What are the trends that we're seeing in the high-net-worth market, both in terms of demand, but maybe also in terms of supply, you know, and providers of these kind of investment capabilities?
Michael Schnitman: Well, I am very excited to see the growth that has occurred. In the past 4 years, if you look in the United States. And you look at some Cerulli which is a well-known market research firm in the asset management space. If you look at Cerulli data, the assets in non-traded REITs, non-traded. BDC’s, interval funds tender offer fund, they have doubled in the past 4 years and that's really energizing. You also look at where the 60/40 portfolio traveled as far as its overall performance over the last 12 to 18 months, and that weakness has been a catalyst for increased demand as well as asset managers being more proactive at offering these types of strategies and creating structures that can allow accredited retail investors to access these private markets capabilities. So you've got a significant number of managers entering the space. And then those managers who already were in the space are now amplifying the access that they're delivering by broadening the set of vehicles by which advisers can avail themselves of these strategies.
Steve Peacher: Well, it's certainly a mega trend, I think you and I believe it. I think others in the market believe it. And there's gonna we're gonna see a lot of activity in the sector, I think, you know, for a long time in alternatives in the retail sector. Let me thank you for that. Let me let me end, as I like to do with a with a personal question. So, one of the things you and I talk a lot about is being on the water on boats, and you know our experiences with that, and I know you spent a lot of time growing up sailing. And so tell me about did tell me about some particularly unusual or hairy experience you had on a when you were spending time on sailboats.
Michael Schnitman: Well, you're right, Steve. Sailing is deep in my blood, and I've been on the water my whole life. I was lucky enough to when I grew up my parents had a sailboat that we spent every summer on all the time, and I can remember a very hairy situation one time where I was asked to take the boat down from Southwest Harbor, Maine, to Boston Harbor by my father. He couldn't go on the trip because it was a it was during a time when his work didn't allow him the time to go. And so we left Southwest Harbor and we went out southwest toward Monhegan Island, which is a sort of a jumping off point if you're gonna go way outside offshore, and we went outside offshore, and then the fog started rolling in, and anybody who goes to Maine sailing knows that the fog can roll in and out without notice. And back then, this was the 1980’s and early 1990’s. And so radar was there, but GPS wasn't there. And so you'd navigate through something called LORAN and LORAN was something that was, you'd use a paper chart and to triangulate your location. Well, in any case, it was pretty scary to be out there in the middle of the ocean between Monhegan Island and Boston Harbor, where you're literally a hundred 50 miles offshore in pea soup fog, wondering exactly which direction you're going trying to triangulate between the currents and between the wind, and you're in a sailboat and trying to you know manage your fuel use. So you don't want to use your engine and lots of moving parts. But that's what makes boating exciting and fun.
Steve Peacher: Well, my, my thing about boats is things happen in slow motion really fast, so that may have been one of those situations. Well, listen, Michael, thank you very much. A lot of insights into what's a big trend, as I mentioned in the alternative space and thanks for giving us that, and thanks to everybody for listening to this episode of “Three in Five.”
Michael Schnitman: Thanks, Steve, pleasure to be here.
[1] “A Study of Allocations to Alternative Investments by Institutions and Financial Advisors”, Fidelity. 2023: https://institutional.fidelity.com/app/proxy/content?literatureURL=/9909709.PDF
[2] S&P CapitalIQ data, 2023
[3] SLC Management data, 2023
[4] State Public Pension Investments Shift Over Past 30 Years, Pew Charitable Trusts, 2014
[5] 2021 asset allocations in Fortune 1000 pension plans, Willis Towers Watson, 2022
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