As investors struggle towards the end of a volatile 2022, which through mid-October had seen the S&P 500 with dividends down -23.9% and 10-year Treasury and 30-year Treasury bonds down -18.1% and -33.8%, respectively, the importance of alternative investments as part of an overall asset allocation continues to grow. Accordingly, it is unsurprising that interest in illiquid alternatives such as non-traded real estate investment trusts (REITs) and non-traded business development companies (BDCs) is increasing sales. Fundraising for non-traded alternative investments totaled $77.1 billion year-to-date through August 2022, a 56% increase over the same period of 2021, according to Robert A. Stanger and Co. Lead by the Blackstone Real Estate Income Trust (BREIT), sales of net asset value non-traded REITs reached $26.0 billion, followed by non-traded BDCs with $18.7 billion and interval funds with $18.0 billion. Total alternative sales are projected to reach a record-breaking sum of $120 billion in 2022.
While not everyone understands the advantages of these vehicles and how, in many instances, they can be a source of income and non-correlated returns, it is increasingly clear that large distributors are dedicating significant resources to these structures. As part of its “Project Thunder” program, for example, Bank of America Merrill is making a multi-year commitment to its alternatives platform, aiming to increase its due diligence and underwriting team by 50% and grow field support by 25%. It has added non-traded REITs, BDCs and alternative model portfolios, and lowered the investment minimums for certain products to $10,000 from $25,000. The objective is to keep up with the rising retail demand for alternatives by making them more accessible to its advisors and their clients who are accredited investors.
Naturally, this increased demand has resulted in organic product development and M&A activity at a number of asset managers that have historically been known for their equity and fixed-income capabilities. For example, in late 2021 T. Rowe Price completed the acquisition of Oak Hill Advisors, a leading alternative credit manager to serve as its private markets platform and will shortly launch a co-branded non-traded BDC. Similarly, Nuveen Churchill broke escrow in August with a $264 million non-traded BDC, and Fidelity is in the process of launching a non-traded BDC that should be available in the near future. While non-traded BDCs have experienced tremendous growth, with capital formation up 113% through August versus last year, non-traded REITs have witnessed a number of new entrants as well—including the PGIM Private Real Estate Fund in June—all of which are looking to follow in the successful footsteps of BREIT.
Ultimately, illiquid alternatives such as non-traded REITs and BDCs are powerful investment instruments, which in the hands of a skilled financial advisor can hedge downside risk and limit volatility. They complement liquid alternatives offered in a mutual fund wrapper such as Hedged Equity and Market Neutral strategies and cash holdings and act as a buffer during difficult markets.
As a leading provider of business intelligence tools, such as WalletShare for Alternatives, SS&C works with some of the largest traditional and alternative investment managers to help them identify financial advisors—not just with a potential interest in their product offering, but also a high likelihood of implementing investment strategies that make use of their most competitive capabilities.
Alternative investment strategies will likely experience continued growth in the coming years. However, while performance will be key to continued asset-raising success, it must be combined with the ability to identify those financial advisors with the highest propensity to utilize their services. SS&C’s Research, Analytics, and Consulting team can help asset managers target the best opportunities and optimize their distribution efforts. To learn more, contact us.
Written by Michael Andrews, CFA
Head of Investment Products Research & Consulting