Wealthy investors know the superior returns and diversification opportunities that alternative investments provide—particularly in the current inflationary investing environment. Private equity has posted 14% returns globally over the past 25 years, compared with 7% through the MSCI World Index.
However, the mass affluent and even high-net-worth individuals are far behind the curve when it comes to understanding alternative investments. High-net-worth individuals allocate an average of 22% of their wealth to alternative investments, while endowments and funds allocate closer to 57% of their portfolios.
That gap will narrow in the coming years as investors of all types become increasingly aware of alternative investments. Bain & Company projects institutional capital allocated to alternative investments will grow 8% annually over the next decade, while individual wealth invested in alternatives is expected to grow 12% annually.
Challenges for greater adoption
Private equity firms have set ambitious targets for expansion into the retail markets. Blackstone seeks to expand retail capital from $200 billion to $500 billion, while KKR expects 30-50% of new capital to come from private wealth channels over the next few years.
Despite the need to grow retail capital, the industry faces obstacles in raising awareness and understanding of the investment model. It requires a modern solution to close an investment quickly and accurately report performance. Further, a complex alphabet soup of regulations adds to the difficulty in tracking investments and taxation.
At a more basic level, alternative investments are largely unfamiliar to many investors. Even the big names in private equity can draw a blank from many high-net-worth individuals, who are likelier to know about household public names like Fidelity or Charles Schwab, with limited presence in alternatives. That's nothing to say about the fact that smaller funds often outperform larger players.
Without a clear way to get started, investors likely feel intimidated by what appears to be an impenetrable investment class. Much of that concern owes to genuine roadblocks, such as the traditionally high investment minimums, various legal paperwork, and the limited number of investors allowed into a fund. Other concerns are less realistic, such as misconceptions of liquidity and risk.
Generationally, however, the tide may be turning. Millennials and Gen Z investors have grown up in a digitally connected world and could be the cohort that drives the broader adoption of alternative investments.
Exploiting digital solutions
Gridline's platform provides solutions to many of the legacy challenges of alternative investments, helping investors and RIAs close investments faster and manage fund administration more effectively.
The platform's fully-digital approach streamlines the process and reduces the need for manual forms and documents, while automated KYC and AML checks provide compliance with the latest regulations. Investors can also easily track their investments' performance in a centralized dashboard and access a cleaned, templatized view of their clients' asset class allocations.
Ultimately, alternative investments have become an essential part of the portfolio for many accredited investors. Smaller investors, however, are oftentimes lagging in understanding and awareness. Gridline's innovative platform is designed to bridge that gap, helping investors and RIAs seize the opportunity to benefit from the superior returns provided by alternative investments.