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In this panel from Alts Expo December 2022, four experts discuss the surge of interest in alternative investments, and make predictions for what the year ahead may bring for the industry.
The panel was moderated by Andy Hagans of AltsDb; panelists include Stacy Chitty of Blue Vault, Anya Coverman of IPA, and Robert Worthington of iCapital.
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- Assessment of the current macroeconomic environment, and the impact of the uncertainty on the alternatives industry.
- Discussion of asset classes that have momentum heading into 2023, and which may be poised for a period of strong performance.
- Likelihood of major legislation coming out of a divided Congress in 2023 and beyond, as well as rule-making at federal and state agencies that may impact the alternatives industry.
- How the crypto meltdown and FTX bankruptcy may translate to increased regulation across other asset classes.
- Predictions for the alternatives industry in 2023 and beyond.
- Live Q&A with conference attendees.
- Andy Hagans | AltsDb
- Stacy Chitty | Blue Vault
- Anya Coverman | Institute for Portfolio Alternatives
- Robert Worthington | iCapital
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
Andy: Yeah. So, what are the trends that alternatives investors, that wealth managers need to be aware of as we head into the new year? That’s the question that we’re gonna answer in this panel. But before we dive in, I wanna briefly introduce each of our panelists.
First up, we have Stacy Chitty, who’s co-founder of Blue Vault. So, Blue Vault is a research service that provides its subscribers with factual performance metrics, from beginning to end, on all types of alternative investments, including non-traded REITs, BDCs and closed-end funds, interval funds, and private offerings. Blue Vault is also hosting the upcoming Blue Vault Bowman Summit in March. I think a lot of our attendees, especially wealth managers and industry professionals, might be interested in that March event that’s being produced by Blue Vault. So, I encourage everybody to check that out. Stacy, welcome to the panel.
Stacy: Thank you, Andy. Glad to be here with you.
Andy: And next up, we have Anya Coverman, President and CEO at IPA. And I should mention that Anya was recently named President and CEO, well, relatively recently. And there’s a lot of excitement around the IPA strategic plan for the next few years. So, who is IPA? If you’re not already aware, the IPA provides national leadership for the alternative investment industry. Very well respected in D.C. and amongst policymakers, and really, all the big names in our industry are members of IPA. They do a lot of important work. Anya, welcome.
Anya: Thank you so much. I’m thrilled to be here.
Andy: And last but not least, Robert Worthington, managing director and head of independent wealth solutions at iCapital. iCapital is, I believe, the largest alternative investment platform on planet Earth. They reach a tremendous number of wealth managers, and really, indirectly, retail investors. And iCapital has done a lot to really expand access to alternatives with their platform. iCapital is a friend of the show. I should mention we recently had Robert’s colleague, Steve Houston, on as a guest on our podcast. And I want to thank Robert and iCapital for participating today. Oh, Robert, we still have you muted. There we go.
Robert: Yeah, thank you. Sorry about that. Thank you, Andy. It’s a pleasure to be here, and look forward to a very, you know, intense and good, you know, discussion on alternatives, and where it’s going.
Andy: I hope it gets intense. I love it. We have a lot of excitement here. So, before we continue, and I’m gonna dive in in just a sec, just a reminder, if any of our attendees have any questions for myself or the panelists, you can just use that Q&A chat feature within Zoom. It should be towards the bottom of your Zoom toolbar. I’ll make sure to leave some time towards the end of the panel where we can interact and do some Q&A.
So, the first question I’m gonna pose to you, Stacy, first, and then I’ll let Robert and Anya chime in. How is the current macro picture affecting the alts landscape? Are alternatives outperforming, either in terms of inflows or in terms of performance during this rough patch that we’ve had in the last nine months?
Stacy: Yeah. Well, thank you, Andy, for the question. Let me first of all thank you for doing this, and inviting Blue Vault to participate. Let me also say hello to Anya and Robert, my colleagues on the panel here. Wanted to say good morning or good afternoon to you guys. Thanks for letting me participate.
You know, Andy, I think, from a macro standpoint, I think we’ve all heard about interest rates, we’ve all heard about inflation, we’ve all heard about earnings problems, fiascos. Is that all going to play and have an effect? Yes, absolutely, it’s going to have an effect. It may not have had an effect quite yet. Although it’s probably happening, we just don’t see it quite yet with some of the commercial real estate that underlines some of the products in our space.
And just to briefly touch on one of your other questions there, even though we will be affected by it, we have outperformed, both from a capital raise standpoint. If your listeners don’t know about the capital raise records that are being set this year and the last year, I don’t know, they may not have been paying attention much. It’s, you know, of course now, who’s doing it? That’s a different conversation, but… So yeah.
Andy: Well, Kevin Gannon, our keynote speaker, he actually went in depth to all the capital raises this past year, and, you know, the numbers were really impressive. I mean, obviously, we’ve seen some outflows lately in a couple products, like non-traded REITs, but even the availability of those outflows, and the liquidity to do that was, you know, according to him, was a good thing for the industry.
Stacy: Yeah. And we may get into this later. I don’t see the outflows, I don’t see the redemptions being a big problem. I know they made the news and all that. It’s not a big problem, for most of the sponsors, the issuers. And then the last thing I’ll just say, from a performance standpoint, we track the performance on a quarterly basis, and have since 2009. The performance has been outstanding.
Performance of alts across the board is so much better today than it really ever has been. And then the last year or two, and especially this year, the non-traded REITs, the real estate that underlies the non-traded REITs, really outperformed the publicly-traded REITs. So, all in all, it’s been very, very good up until this point.
Andy: Robert, how about you? I mean, obviously, iCapital has a little bit of a different vantage point, a really good vantage point, to kind of see all this play out in real time. Have alts entered a rough patch?
Robert: As of the moment, no. I think will global events going on, capital markets, will it impact a little bit on the short-term basis? Yes. But I’ll tell you. So, you know, iCapital has a pretty broad reach, not only in the U.S., but across the globe. I mean, with $150 billion of assets on our platform, of which $30 billion to $35 billion is outside the U.S., Europe, Asia, and we’re growing in Latin America, we have a lens into, you know, seeing what’s going on in the private wealth world, again, certainly in the U.S., but also outside the U.S.
And just a little bit, depending on the segment of our businesses, you know, we’re up versus…we have a record year. We’re up versus last year, anywhere between 20% and 40%, depending on the business unit. So, now, I will say this. You’ve seen a little bit of slowdown in the last couple months. I think part of that reason though, when we talk to advisors, it’s not so much due to that they’re allocating less to alternatives or their desire to allocate less. It’s the fact that with public markets down, and, you know, private markets doing reasonably well, little bit of lag in pricing, but most, not all, but most of the hedge funds, especially, you know, when you talk about the global macro funds, the multi-strategy funds, those are doing quite well.
What’s happened is now the allocation, if you have a target allocation of 10% or 15% to alternatives, that allocation’s actually boosted up. So I think it’s a little bit of slowdown there, but I don’t think any of the medium-term or long-term trends will be impacted by these global events. In fact, you know, if ever there was a year in the last decade as to why alternatives being used properly in a portfolio highlighted people why it makes sense, this is the year for that, because of, in terms of how broadly alternatives have performed.
And like any asset class, there’s always winners and losers, but broadly, they’ve done quite well. And a lot of the hedge funds have held up well, and in some cases that they should, you know, the global macro side has been positive. So, you know, strong year. You know, still raising a fair amount of assets. Little bit of slowdown that we’ve seen. That’s okay. But medium term, longer term, more and more interest coming from advisors, you know, more and more outreach on behalf of advisors into us. And we actually have a pretty sizable new business development team too. So, you know, I would say there’s always a little bit of fits and starts, there’s always a little bit of the tactical side, but those medium and long-term trends are looking very strong.
Andy: Duly noted. And I think if iCapital is bullish, that’s probably a pretty important data point for the whole industry. And as you alluded to some of these recent headlines, sounds like maybe, you know, the redemption story on non-traded REITs playing out in “Wall Street Journal,” elsewhere, not necessarily fake news, but maybe a little bit sensationalistic I suppose we could say. Anya, how about you? You know, do you hear from your members? Is this considered a… Is there a lot of anxiety right now, or is it full steam ahead?
Anya: No. I mean, I’ll just build on what was said by my fellow panelists. I mean, uncertainty is actually a big opportunity for the alternative space. You know, the S&P was going up 15%, 20%, and so you had advisors plowing their money into ETFs, mutual funds. And to some extent, you know, you need to do the work to understand alternative products. And so, you know, if you’re investing for the right reasons, alternatives, you know, are designed to help during volatile times.
So, you know, private real estate is probably one of the only products that you can invest in that will either keep up with or exceed inflation. So, these are products that provide diversification, stabilization. And frankly, if you wanna look at it from a different vantage point, market corrections are certainly why you diversify. And then, you know, so, there’s a lot of opportunity right now to have diversification. You know, there’s always gonna be investment cycles in the market. And then there’s certainly, you know, the macroeconomic environment that’s out there, and investors are looking at important questions such as profitability, valuation, you know, corporate earnings, and things like that. But this is really…this is a strong time for alternatives, and really an exercise in why you do wanna have a diversified portfolio.
Andy: Yeah, that’s interesting. Kind of a common thread that I think I’ve heard from all three of you is that this year should have been alternatives’ time to shine. And it seems like that has been the case actually, as, you know, investors who’ve already had that allocation to alternatives, and family offices who’ve already had that allocation, are probably glad that they did, looking back in the past year.
You know, earlier today, in our panel where we talked about inflation and asset classes that performed well during periods of higher inflation, Kara O’Halloran of FS Investments, she always talks about the RICE asset classes, you know, real estate, infrastructure, commodities, and energy. So, we talked a lot about asset classes. But I wanted to ask, within the industry, are there particular product wrappers, like for instance, qualified opportunity funds, DSTs, non-traded REITs, BDCs, are there any specific wrappers that you all think have a little extra momentum maybe heading into 2023? Robert, why don’t we start with you?
Robert: Sure. I would say, look, the private credit area, where, you know, a lot of money has been raised, especially in BDCs and direct lending and all this, you know, has been a strong point for the industry. I think if you’re allocated to the experienced, top-tier firms, you’re gonna be in good shape. Obviously, companies and portfolios will be impacted a little bit. That’s just the nature of a rising interest rate environment, you know, slow down in the economy.
But, you know, what we’ve observed is these accredited offerings. So, if you think of alternatives, you know, historically, institutions, very high net worth individuals, allocated to 3(c)(7) limited partnership funds, very high minimum requirements on the investor side. In the last five, seven years, there’s been a really, really exciting trend, in that a lot of the high-quality, well-known, well-experienced general partners, sponsors of these funds, whether it’s private equity, private credit, real estate, hedge funds, you know, have, not all of ’em, but some of them have developed these wrappers that are suitable from a structure standpoint to accredited investors, where I would argue 10 years ago, the quality there was very, very shallow. Okay? Not that there weren’t a couple good funds here and there.
But today, there’s a much broader and deeper offering of really high-quality firms, that are allowing investors at the accredited level, and some even below that, to get into their strategies in these wrappers. Now, you have to understand the differences in the wrappers. One, BREIT, which raised a lot of money, and now has a little bit of redemption pressure, is…because it offers liquidity. If you’re in a 3(c)(7) fund, you don’t offer liquidity. But we’re really excited because one of those trends, I was…you know, we’ve observed is in these wrappers, registered private equity funds, private BDCs, private REITs, the number and the quality of the sponsors has grown dramatically. That is great for advisors and their clients. Gives more choices.
Now, you have to do the due diligence, you have to be prepared to do it, you have to be knowledgeable. But that’s certainly a trend we see continuing. And what it does is it allows the smaller RIA, for example, another advisor, who maybe doesn’t have a lot of really, really high net worth clients, you know, $5 million investible or more, but has, you know, the million to six or seven million-dollar clients, it allows them to enter the alternative space with high-quality offerings, in structures that make sense for them, for their clients.
Andy: Absolutely. I think that’s a great point. I mean, the access, the accessibility of high-quality alternatives has never been higher than it is right now. How about you, Anya? Have you noticed any particular wrappers or asset classes that really have a lot of momentum right now?
Anya: It’s a great question. So, I guess I’ll take this from a different vantage point, which, of course, I think we’re going to continue to see NAV REITs, and tender offer funds, and interval funds. I would say there’s two things that I see a lot of or discussions about, right? One of them is there’s regulatory uncertainty. And, you know, we’re all aware that there was the NASAA REIT guidelines that were out there, and there may be guidelines for BDCs.
So, some of the conversations that are happening right now are, you know, moving to a ’40 Act structure, or moving to a private REIT structure. There are pros and cons for both, you know, being on a public side or private side, or going ’40 Act. But one thing we’re hearing is those conversations are happening. We’re waiting to see how the regulatory discussions and decision-making plays out.
And the second thing I would say, I really think it’s less about product structure, from my vantage point, and more about sort of a multidisciplinary approach to bringing out product. One of the trends is, you know, we have very well-known names coming into our industry. And they’re not only looking at one product wrapper or strategy, but a second and a third one, and sort of a cross-collaboration of multiple different strategies. And that really, I think, is a big trend, and a trend we’re going to see going into next year.
Andy: Yeah. That makes sense, you know, the portfolio or the whole menu or suite of different options. I think, maybe as my obsession with wrappers is just, as an LP, and I think, Jimmy, my co-founder’s rubbed off on me a lot with the qualified opportunity funds, but just, I love tax-advantaged wrappers. You know, we’ve seen qualified opportunity funds today that, you know, energy funds with just tremendous tax advantages. So, I just love all those tax advantages that are often, you know, wrapper-dependent. But Stacy, how about you? Is there a particular wrapper or asset class or product type that you feel really has a lot of momentum right now?
Stacy: Well, I’ll piggyback a little bit on what Anya said, which is, my comments are, I love all the asset…all the wrappers. I think that they are…it’s good to have that diversity. If I were an advisor, for example, I would use not just one of those wrappers. I would use more than one. I believe that the wrapper provides the diversification you need, and then the assets inside, or the investments inside of the wrapper, provide additional diversification.
As far as the assets, I think industrial’s gonna continue to perform well. I can’t see…I can’t make an argument for why it would not. I think self-storage is gonna continue to perform well, and I wouldn’t bet against multi-family. You know, now, some of the other, I think maybe have a little bit more problematic areas. I’m not saying there’s anything wrong with ’em, but I just don’t think that they meet the standards that the others do at the current time.
But most of the issuers in our space, most of the wrappers, are invested in those three assets. So, yeah, I think it continues to be… I’m not a real estate expert. Someone could probably make the case for hotels. Somebody could probably make the case for office. You know, and I would be open to that.
Andy: Well, nobody can make that case, Stacy. Well, I kid. I kid. But, you know, when you said multi-family, just, what brought to mind, “nobody ever got fired for buying IBM.” You know, the old IT managers’ mantra. Nobody ever gets fired for buying multi-family, right?
Andy: It seems like something almost everybody agrees on.
Stacy: Well, when you look, Andy, there’s a tremendous lack of housing in the, a tremendous lack of housing in the country. So, that’s just not gonna go anywhere. And the other thing about it is, when you get into some difficult times economically, you know, individuals might have problems paying their mortgage or paying their rent. They just simply kind of go down the chain. They rent a place, a little less money, but they still rent. So, the fundamentals are really strong in those three areas the way I see it.
Robert: Andy, I’m gonna add just a little bit too, in a couple broad categories, if it’s okay.
Robert: We still see relatively strong flows into private equity, whether it’s still in traditional limited partner structures, as well into the…you know, the registered private equity offerings that have come about in the last five or six years. I would say, it’s taking, on the limited partnership time, you know, it’s taking general partners a little bit longer to raise the money, but they’re still raising a fair amount of money, and we’re seeing good flows into the registered private equity area.
One other, I would say, trend here is, you know, and it started probably about 6, 9, 12 months ago, is, you know, finally, more and more wealth managers are allocating to certain areas of hedge funds. It was pretty relatively dry, outside of a few very successful ones, for a long time. And with volatility increasing dramatically, obviously with rates going up, because that helps the short side of hedge funds, we’ve seen a pretty decent size pickup now in the allocation to multi-strategy hedge funds, that employ numerous portfolio teams and trading teams with strong risk management, overseeing that, together, I already mentioned and talked about the global macro funds, commodity-oriented funds. So, we’ve seen a pickup there too. Private credit has remained strong throughout the year. So, just a couple trends that are broad-based there.
Andy: Yeah. No, that’s really interesting insight. Again, especially given, you know, the iCapital platform, so you guys are seeing that in real time. I wanna shift gears a little bit. And Anya, I’m gonna start with you because I know this is your wheelhouse, but we’ll have time to get everyone’s thoughts. And it’s interesting. So, I wanna ask you about regulatory and legislative issues, but I also wanna mention, this morning, I woke up and saw your article in “The DI Wire,” a guest contribution on this very topic. So, that was very timely. And maybe our producer can link to that article in the chat here.
But obviously, we have a divided Congress now. You know, not that much I guess changing, in the sense that there hasn’t been a ton of movement, although what’s interesting to me is how much can change with, you know, agencies and regulatory law, versus Congress passing a law. So, what’s top of mind for you that investors, like, from an LP point of view, or from the point of view of an RIA or a wealth manager, what are those legislative and regulatory issues that we should be considering as we head into the new year?
Anya: Sure. It’s a great question. And we do have a divided government. You know, we have a Democratic Senate, we have a Republican House, and that means very little is likely to happen. You know, one of the things that will significantly change over the next two years is sort of the era of big packages, you know, big spending bills. You’re not gonna see that in the next years.
And you mentioned, you know, your interest in tax, you know, new tax advantages and things like that, and we get questions from our members all the time about a tax package. You know, that’s very unlikely to happen. The cost of the tax extenders, the child tax credit, is close to, like, a trillion dollars, and it’s just unlikely that Republicans, you know, would ever vote for that. If you see any movement this year, there is a retirement bill. We tend to call it SECURE Act 2.0. It has bipartisan support. That might be something that gets across the finish line.
But the biggest, the things that we’re thinking about for next year, and specifically for the fall, are being able to fund the government, and avoid a shutdown. You know, we tend to fund the government. We’ve had a few shutdowns in recent past. You know, we’ll pass a continuing resolution or some sort of spending package, but that, you know, that can impact the markets as well. That can cause some threat, some uncertainty. You know, we certainly don’t wanna default on, you know, payment of government debt, so we have to lift the debt ceiling, and that’s something that will kind of come to a head in the fall. And again, it always gets resolved. So I don’t think that that’s something. But it’s out there.
And, you know, there’s government funding we still need to do. We have the infrastructure package. There’s still state funding from, you know, the pandemic funding that had been issued, and so that will get dealt with. But, you know, what I always say, and what you see, is that with the legislative world being quiet, except for, you know, a few things out there, that gives a lot of space for regulators to be much more active, both the federal and state regulators.
You know, from a federal standpoint, ESG is, you know, top of the radar. You know, we have the DOL having finalized their ESG role, but we certainly have the SEC’s and their climate disclosure proposal, you know, financial disclosure, is still lingering. And Gensler moves quickly, and their, you know, a huge volume of rulemaking this year, and he’ll certainly want to see those to conclusion.
But I think the risk is that there’s a huge risk of litigation for federal agencies, and the Supreme Court has been really rolling back its Chevron doctrine of giving so much deference to federal agencies. So I think you’re gonna end up seeing a lot more litigation play out. You know, the FTX meltdown and cryptocurrency is another one that everyone’s trying to figure out. Congress is trying to look into regulators, banking regulators. SEC are trying to play in that space. The SEC had already doubled its crypto task force, you know, when Gensler took over.
But those are gonna be areas that you will see a lot of discussions around. And, you know, Congress will maybe think about should it regulate stablecoin. And so, those are probably some of the top-line issues. The states are active. The states, certainly in the alternative space, where they regulate, they don’t regulate all of alternatives, but there are a few specific areas, with the NASAA REIT guidelines and BDC guidelines, that we’re watching very actively. So, there’s just a lot in the regulatory sphere that you’re going to see when it’s a little bit more quiet in Congress.
Andy: Yeah, that’s interesting that the less there is going on in Congress, and I think gridlock is sometimes something that a lot of us can appreciate, but then that opens up space for regulators, and, like, bored regulators looking for something to do. That just kind of gives me heartburn when I, you know, think about it. Maybe crypto will keep ’em busy for a while.
But that being said, we only have about 15, 20 minutes left, and I wanna leave some time for Q&A. So, I’m gonna jump to my final question, and I wanna make sure to give you each a chance to answer this one. It’s always my favorite question. I’ll start with you, Stacy. Do you have any predictions for 2023 in the alternatives industry that you can give us?
Stacy: Well, I kind of believe that there’s nothing new under the sun, especially when it comes to the topics that we’re talking about, alternative investments. I think there’s probably gonna be a slowdown in capital raise. We’ve already seen a couple months. It gives us an indication of that. It’s probably gonna be across the board, with all wrappers, as you say, Andy. But I don’t think it’s gonna be tremendously harmful to any of the issuers in the space. So, I see still a relatively healthy 2023 for all issuers.
I think the key to all of this is that we educate advisors, we continue to educate advisors about the benefits, the features of diversifying their practice by using alternative investments. I just don’t see why more advisors don’t see that. But I do think it’s an educational game, and we’ve just gotta continue to talk the talk. You’re probably gonna see a few NAVs head southward for the first time in a number of years. That’s nothing to be alarmed at. That happened. That’s happened since the beginning of time.
The stock market’s gonna go up and down. Real estate, different alternative investment plays are gonna go up and down. I don’t see a big deal with the redemption increases right now. I think that’ll kind of play itself out. The one thing that I would note is that it could be that one of the reasons Blackstone and I guess Starwood had some of these issues is they have probably, they have advisors who are selling shares of their REIT, that have traditionally maybe not sold alternative investments.
They see Blackstone, they see Starwood, they say that must be good, and it is good. But maybe they don’t have an understanding of what some of the advisors who’ve been using alts for a very long time have, and that is, make sure that you communicate properly to your investor that this is a long-term play. And yes, there is an emergency redemption. Some people may take exception to my word “emergency” there, but I think it’s really…it’s still really supposed to be emergency. And it’s hard for me to argue that there would be such an emergency where you need more than 90% of your liquid portfolio to satisfy a liquid issue.
So, anyway, I see overall, it’s healthy. I think these are very healthy… Again, you gotta be careful, advisors have to be careful with what sponsors they use. That’s probably the most important issue at play. And of course, choose the right asset class and the right wrapper, right structure. So, I guess that’d be my comments, Andy.
Andy: I like it. Well, there’s a lot to unpack there, but I think if I could give it a headline, you know, Stacy isn’t losing any sleep. The sun’s gonna rise, the sun’s gonna set, and, you know, if a NAV REIT goes down a little bit, we’re all gonna be okay. So, still two more for the predictions, and Jimmy will give you bonus points, Anya or Robert, if either of you can make a prediction about whether the Opportunity Zones program will get extended. So, Anya, how about you? Any predictions for next year?
Anya: Well, as I said, I think it’s unlikely there’s gonna be any tax package. So, it’s not to say that there won’t be…you know, there’s bipartisan support for an extension, for better reporting on Opportunity Zones. We’re working with the sponsors on a small technical issue there, but I don’t think that’s gonna be part of a tax package at the end of the year. But the bill’s still out there. It’ll get reintroduced. You know, we’ll see what happens next year, but that’s sort of my end of the year.
But my sort of quick list of predictions for next year. You know, early entrants in a market are never household names, but you now have household names, and you’re gonna…we know, we’re continuing to see very big household names coming into our space. If you look at, like, institutional investors, they have, they went from 5% to 12% of alternatives, and we’re still at 1%. So, there’s a lot of growth. I also think you’re gonna see RIAs with a captive audience stand up firms. We’ve already seen some, and I think that’s gonna be a trend. FinTech, in, playing more in the wirehouse space, that’s definitely gonna be something on the horizon.
And I think that as this space is growing, and is here to stay, and we’re not losing any sleep over it, innovation, and hitting a niche market is going to be a new trend. From a, you know, infrastructure standpoint, you may see emerging market versus ESG, versus renewable infrastructure. So, while you’ll have big firms that are playing across a wide sphere, there’s also gonna be a lot more niche players.
Andy: Interesting. So, that sounds to me just like a maturing industry that maybe we’re transitioning out of that early mover phase and into that, you know, maturation phase. Robert, how about you? Any predictions for next year?
Robert: Well, you know, it’s always hard, but I appreciate going third when you have two esteemed colleagues that have a good feel on the market. So, I’m gonna just reinforce, and then add a couple other comments. So, you know, Stacy talked about slowdown and markdowns. I think, for the first half of the year, both of those will occur. There will be a slowdown in fundraising, allocations, you know, people’s portfolios are down, and all that. That’s fine.
And markdowns are just natural, because in less liquid products than a mutual fund, ETF, or a stock, there’s just…you know, there’s delays in pricing. That’s natural. And you take the according…you know, you take the markdowns accordingly. And historically, in the private markets, you…and the auditors have never really said you should mark down just as much as the public markets, because that’s full of valuation, but also very much of an emotional quotient to it. And so, you will see, in some of the BDCs, I was with one of the largest one…largest private debt players last night, and REITs, you’ll see, you know, markdowns, as you should. They won’t be as dramatic as the public side, but that’s just natural, and that’s what they should do.
Andy: Well, Robert, I’m sorry to interrupt you there, but we’re about to move into our Q&A phase, and I got a question about that very topic that I wanted to ask. So, the question was, you know, are these private funds, “doing well?” Is that merely a reflection of a lag in pricing? And I think you just made a really interesting point that Mr. Market can be a little bit manic, right? So, is it fair to price it with a little bit more moderation with those valuations?
Robert: It is fair to price it, because one of the things, as a manager of a private portfolio, whether it’s a manager of 15 different companies, where you’re the equity owner, or a lender to 15 companies that are privately backed by private equity, or holding various degrees of different type of real estate, as long as the underlying businesses’ cash flow, revenues, however they’re judged, are still…they could be impacted a little bit, but they’re not dramatically impacted, then a less-than-public-market markdown is appropriate. And I think you find that almost all the times. And if you’re with good sponsors, that have good auditors, I can tell you that they take that very, very seriously, and they want to mark appropriately.
But, you know, REITs are down 25%, but they could be up 25% in six weeks. So, if you’re a private manager, you’re, like, you’re looking at the underlying fundamentals, you’re looking at the public markets, but you’re not gonna be subject to the whims of this short-term movement. But that’s just the natural state, and it’s, you know, that’s the way it’s always been. So, I would expect a little bit of those markdowns, yes.
And again, I think that’s appropriate. There will be, I still believe, even though you might see a slowdown in fundraising, there’s gonna be wider adoption. I mean, the number of firms we’re talking to, RIA and other advisory firms, under big wealth management platforms, that have interest, that are doing, you know, later stages due diligence, that are really committed to it, putting the timeframe, will allocate in 2023. So, I think you’ll see broader and broader adoption as that comes.
I would also say, you know, for those vehicles out there that are raising new capital, right, starting now, starting 2023, look, it’s, you know, the prices and multiples, both public and private, have come down. It’s a, could be a very, very good time to buy. Historically, some of the best vintage year performances of private investment vehicles, whether it’s real estate, but especially private equity, have been, you know, after market dislocations, however defined.
Andy: Interesting. Okay. Well, you know, on the topic of adoption, because Robert, you just, you know, predicted that we’ll see wider adoption, I think I agree with that. I think we probably all agree with that. We had another question, “I’m curious about the resistance of advisors to alts that Stacy had mentioned. Why are these advisors hesitant? Is it a compensation issue? Or like Andy had mentioned, that, ‘Nobody gets fired for buying IBM,’ like, nobody gets fired for buying the S&P 500?”
And I mean, this is interesting, because we have RIAs, you know, at the conference today with us on this call right now. We have wealth managers watching us right now, but those are the group that get it, right, that kind of live and breathe this stuff, are already including ’em in client portfolios. What about the rest of RIAs and the rest of the wealth managers who still haven’t adopted yet? I mean, to me, it feels like maybe because I’m in the industry, it feels like, well, of course, everyone’s allocated to alts now. But there’s still a ton of RIAs that have virtually no clients with any allocation to alts. Stacy, we’ll start with you with this one. What’s the obstacle there?
Stacy: Well, we could talk about this for an entire hour. In fact, you could go all the way back to the ’80s, and the limited partnership days, the Tax Reform Act of ’86, which did a number on a lot of deals, a lot of advisors. But a lot has changed since that point in time. I think today what it is, is it’s easier to be more simplistic.
Well, first of all, a lot of advisors just don’t know there’s an option to do this. And they may hear of alts. They may think of one type of alts. They don’t…they’re just not aware. But the other thing is, if they are aware, it’s a little bit harder…not harder. You have to put in a little bit more time to do your research and your due diligence and learn the strategies. So, it’s just easier not to do it. Okay? It’s just like it’s easy to buy IPM or the S&P 500.
So, you know, one of the things that I’ve been talking about recently are elite advisors. I think elite advisors are those who are curious enough to look beyond just the 60/40 portfolio, the stocks and the bonds. And that’s what really separates the advisors, you, Mr. RIA, from the guy down the street. So, and again, I think things are building. It’s just like Robert said. Things are building, and advisors are catching onto this, some that have never done this or never considered, they’re catching onto it. So, there’s naturally gonna be an increase in percentage of advisors.
Having said that, yeah, I do think, long-term, that pays dividends for all of us in the space. Short term, there’s probably gonna be a little bit of pullback for capital raise. But I think overall, more and more advisors are gonna start adopting alts. And they’ve got a lot that’s on their side today. Just real quickly, you got better asset managers in the space than ever before. You’ve got lower fees. You’ve got better-performing portfolio managers.
Everything is in place, I think, for the first time forever, really, for more advisors to use alts. I think it’s just a matter of getting the message out, everybody talking about it, educating, and then it’s gonna happen. So, it’s not something I don’t think to be concerned about anymore. Now, 10 years ago, maybe you could be concerned about it, but I think things really look up, as far as that trend goes, and it’s the right thing to do for their clients, Andy.
Andy: Yeah. And…
Stacy: It’s the right thing to do.
Andy: And Stacy, if there’s any laggards, you know, at some point, those RIAs are gonna age out, to put it politely. You know, they’re gonna retire, and the young buck RIA taking their place, she or he is gonna probably be invested in alts. So, we’re almost outta time. I got about one more minute, so I’ll just do a quick rapid-fire question. One of our attendees is asking about 1031 exchanges. There was a little bit of buzz that they were gonna get rolled back or overhauled or greatly limited. Anya, is there any chance of this happening? Can we sleep tonight?
Anya: You can sleep tonight. No, listen. 1031 like-kind exchanges are…it’s a huge number, it’s a huge pay-for when Congress is looking for money. But, as I said, you know, we fought that battle last year and won it. We’ve fought that battle before. You know, when I say last year, it wasn’t in the reconciliation package. Will it come up again one day in the future? It probably will. Because once you have a score, once there’s a dollar put on something, it comes up again.
But you can rest assured in the short…or in the near to the long term, you know, there’s no tax package, or there is…we are not in a Congress where there’s any likelihood that there’ll be any, you know, consent to move anything like that forward. So, absolutely, sleep well tonight on that. And just to what Stacy said on the last question, I wanna emphasize the education piece, and point out a statistic. Sixty-five percent of sales for NAV REITs are in no-load shares, which is a really big number. So, you know, the change in the fee structure, and just knowledge about alternatives, is really important for the advisor community to look into and understand.
Andy: Excellent. Robert, I’ll give the last word to you. Any thoughts on 1031 exchanges or on advisors who are laggards in embracing alts?
Robert: I’m more of an expert on the latter. Anya did a great job there on 1031. I would say this. Slow down next year, but I’ll make a prediction. By August, September next year, you start to see flows really starting picking up as we work through some of the macro issues here. As advisors that haven’t allocated, look, these are a little more complex. They have less liquidity. Some have no liquidity if you have the limited partnership. So you need to take your time, you need to look at these. And it takes probably more due diligence, and that’s fine.
But I will close on this, to say more and more over the last three to six months, I’ve heard either research people at wealth management platforms pretty sizable, and other, just individual RIAs saying, the fact is we know it makes sense from a portfolio standpoint. We have to build that expertise, because you don’t just wanna jump into it without expertise. But we know we have to do it, partially… Well, portfolio, for sure. That’s first and foremost. But now I’m hearing more and more, “We know we have to do it, because other people are coming after our clients that do do it,” and they’re playing defense around it. So, I’ll close with that.
Andy: Never bet against human nature. I think that’s a very good point. Tremendous insights from our panel here today. I can’t thank you enough. Stacy Chitty of Blue Vault, Anya Coverman of IPA, Robert Worthington of iCapital, thank you so much for joining us today.