Alternative Investments Continue To Gain Steam With HNW Investors

As the global bull market continues for both publicly-traded equities as well as alts, it’s worth taking stock of the “big picture.”

Recall that earlier this year, KKR published a survey indicating alternative investments are gaining in popularity among High Net Worth (HNW), Very High Net Worth (VHNW), and Ultra High Net Worth (UHNW) investors. (HNW typically defines investors with $1 to $5M in assets; VHNW applies to investors with $5M to $30M in assets; and UHNW applies to investors with >$30M in assets.)

Among the findings:

• “Ultra High Net Worth families remain heavy users of a variety of Alternatives… [for example,] families that have over one billion in assets under management have from 51-54% of their total assets in some type of Alternative product.”
• “Leading CIOs in the Ultra High Net Worth sector are moving more towards longer duration, compounding-oriented private investments. Indeed, while the illiquidity premium remains an important competitive advantage that Ultra HNW investors can exploit across multiple products, there appears to be an increased realization that private funds that are focused on multiples of money may be more attractive than IRR-focused funds for tax sensitive accounts.”
• “There was a meaningful shift upward in allocations to private equity and real estate (at the expense of hedge funds and private credit). “We repeatedly heard CIOs mentioning their intent to be longer-term equity owners where 1) there was greater potential to influence outcomes in a tax efficient manner; and 2) the opportunity to take advantage of the illiquidity premium in today’s low rate environment was more sizeable.”

The KKR report highlighted the popularity of alternatives overall, driven partially by the illiquidity premium; and especially the popularity of alts products geared towards tax-efficient capital gains, rather than income.

These trends appear to be continuing into the second half of 2021, with healthy inflows into tax-efficient real estate alts such as Qualified Opportunity Funds.

Of course, as publicly-traded stocks continue their run-up, allocations to alts on a percentage basis may be holding constant, or even dipping slightly. That said, alternatives’ growing popularity, plus investor concerns about future tax increases and growing inflation, could help make 2022 a record-breaking year for alternatives.