Firms push to make private markets more like publics

• Key insight: The bottleneck preventing wealth advisors from moving retail investors into private markets is not regulatory constraint but the absence of integrated financial technology.
• Expert quote: "We're somewhere between $13 trillion and $15 trillion in alternatives and privates today. If that is ever going to mirror the public equities and be north of $100 trillion, you need an entirely different infrastructure that supports every element of the transaction life cycle." — Logan Henderson, CEO of Gridline
• Supporting data: Fifty-seven percent of asset managers now prioritize delivering semiliquid or illiquid alternative access to advisors — a 17 percentage point increase year over year — ahead of an anticipated $2 trillion influx into private markets in the next five years.

As the SEC seeks to lower regulatory hurdles to investing in private markets, various asset managers and fintechs are busy building the technological bridges intended to provide better access.
Logan Henderson, the founder and CEO of the alternatives management firm Gridline, said the biggest obstacle preventing advisors from moving regular investors into private equity, private credit and similar opportunities isn't government regulations. Rather, it's the absence of technological entrance points like those that have made investing in stocks, bonds and commodities possible with a simple button click.

With private markets, Henderson said, functions like evaluating investment options, completing transactions, managing investments and reporting results are often performed by separate systems. Part of Gridline's mission is to bring that all together.

"You know, depending on what underlying analyst report you're looking at, we're somewhere between $13 trillion and $15 trillion in alternatives and privates today," Henderson said. "If that is ever going to mirror the public equities and be north of $100 trillion, you need an entirely different infrastructure that supports every element of the transaction life cycle."

READ MORE: SEC pushes private market access, but retail is already in 

Asset managers want advisors to have more access

Gridline is part of a much larger trend. The research firm Cerulli Associates reported last week that asset managers are increasingly seeking to ensure advisors and their clients have access to semiliquid or illiquid alternative investments, which sometimes disallow investors from taking money out for years.

Nearly six out of 10 respondents (57%) to a recent Cerulli survey of asset managers said one of their priorities is to provide greater access to these semiliquid and illiquid opportunities. That's 17 percentage points higher than last year.

Cerulli has separately estimated that financial advisors, over the next five years, will add $2 trillion to the roughly $2.2 trillion already committed to private markets on behalf of their clients. Meanwhile, hardly a day goes by without a large wealth manager or other firm announcing steps it's taking to make hitherto exclusive private markets more open to advisors and their clients.

On Monday, Raymond James said its advisors now have access to portfolios designed to give wealthy and ultrawealthy clients access to a mix of private and public investments. Last week, the portfolio provider AssetMark announced the addition of two interval funds — which let investors take money out at set periods — to its current stable of funds providing access to private credit, private real estate, private infrastructure and private equity.

InvestCloud, another tech-driven asset manager, has committed to putting $50 million into its Altic and PM+ offerings, both of which are designed to help advisors put clients into alternative markets. Tim Buchner, the chief operating officer of Atlic, said he and his colleagues are trying to build a rules-governed investing system offering protections similar to those advisors and clients enjoy when putting money into stocks, bonds and similar investments.

Buchner said investors who want to invest in private markets are often confronted with barriers that were removed from public markets well over 30 years ago.

"It's very paper heavy," Buchner said. "And sometimes they have to pick up the phone and talk to their advisor and look at thousands of pages of documents. That's what we're getting away from."

Private markets have piqued both advisors' and clients' interest. Financial Planning's exclusive Financial Advisor Confidence Outlook (FACO) survey of 195 advisors in early June found that 65% of the respondents said they had recommended at least one alternative investment to clients, while 11% had recommended five or more. 

READ MORE: Despite private market concerns, advisors and clients are undeterred 

Likely because of their illiquidity, private markets were more likely to be recommended to wealthier investors. The FACO survey found that 83% of the respondents who manage $250 million or more recommend alternatives, while only 49% of those managing less than $50 million did the same.

Many private investments are now open only to so-called accredited investors, whom the SEC defines as people with at least $1 million in assets (excluding their houses) and an annual income of at least $200,000 for the past two years for single earners and $300,000 for married couples. But learning whether a client is accredited wasn't the top priority of advisors in the FACO poll.

Survey takers said they were more likely to look at clients' willingness to take risks (cited by 83% of the respondents), investment goals (80%), net worth (76%) and liquidity needs (72%). A client's status as an accredited investor was cited by only 64% as a top screening query for suitability for private investments.

Although the SEC has considered revising its accredited investor requirements before, it's currently looking at other ways to increase access to private markets. The regulator, for instance, has submitted a proposal to the White House Office of Information and Regulatory Affairs calling for the elimination of a rule that prevents advisors from charging so-called performance fees to anyone but qualified clients, who must have at least $1.4 million invested with an advisor and a net worth of more than $2.7 million. Performance fees are generally charged on capital gains or appreciation and allowing advisors to charge them is generally seen as a way to induce private-market investing.

Separately, SEC Chairman Paul Atkins announced last year that regulators were ending a policy that for more than two decades had placed strict limits on closed-end funds' ability to access private markets on behalf of retail investors. Previously, closed-end funds — which offer only a set number of shares for investors to buy and sell on public exchanges — had been able to put no more than 15% of their total allocations into private investments. That change has greatly increased retail investors' access to interval funds and other semiliquid vehicles.

READ MORE: Private assets in defined contribution plans could top $1T by 2030 

What role do advisors have?

With greater access comes the inevitable question: Who is responsible for making sure clients aren't taking unnecessary risks and are putting their money into suitable investments? For the asset managers and fintechs building the bridges, it's still the advisor's responsibility.

Henderson of Gridline said there are more than 15,000 private funds on offer today and his firm certainly has no intention of providing access to them all. Henderson said that although private managers aren't required to release as much information as public companies, there are still data-reporting standards many hold themselves to.

Not being able to do that is a "red flag within itself that either they're not ready for large scale kind of capital deployments and managing outside money on behalf of others," Henderson said.

But after deciding which investment opportunities belong on Gridline, the firm's role is to ensure they're easy to compare and contrast when looking at traits like risk, liquidity and likely returns, Henderson said. 

"It is less about making the investment decision, but putting the information into a standardized form so that investors have the ability to have the knowledge in a uniform fashion across every investment opportunity that they're analyzing and evaluating," he said.

Introductory bullet points created by AI with editorial review.