Individual investors are increasingly becoming drivers of growth across the alternatives landscape due to a combination of factors. As wealth continues to grow among mass affluent and high-net-worth investors, there is a growing demand for alternative strategies and private markets. In particular, three investor segments showing signs of significant growth include women, engaged first-time investors, and mass affluent investors. The transfer of wealth from baby boomers to younger spouses is also expected to bring about a sizable amount of assets into private markets over the next decade, further fueling the demand for alternative investments.
One of the fastest-growing segments of alternative assets is private credit, which has evolved and grown exponentially over the past decade. Nonbank lenders, such as asset managers, have filled the gap left by large banks exiting the market, leading to the dominance of private credit in the alternative investing landscape. Asset-based lending, a subset of private credit, is increasingly drawing investors for its differentiated returns and role as a diversifier to other private credit investments. Additionally, interest in private markets as a whole is rising, with an anticipated $1.3 trillion in private capital expected to be allocated to private assets by 2027.
The landscape of alternative investment vehicles is expanding to cater to individual investors, with new registered alternative investment vehicles providing more liquidity and transparency. Regulators have made changes to give individual investors access to the benefits of alternatives, such as expanding the definition of accredited investors to include individuals with minimum standards of investment knowledge. Some of the new semi-liquid alternative vehicles include tender offer funds and business development companies, aiming to narrow the gap between private markets’ historical closed-end structures and more familiar investment structures for retail investors like mutual funds.
Market uncertainty and radical macroeconomic shifts are reinforcing the role of alternatives within a diversified portfolio as investors seek downside risk protection and downside protection in volatile markets. While reducing exposure to public markets remains a primary goal for many advisors, enhancing or differentiating returns is expected to become a key objective in less volatile markets. Alternative investments by their nature involve a substantial degree of risk, including total loss of capital, and there is an opportunity for significant losses. Investors should be aware of the unique characteristics and risks associated with alternative investments, as well as the limited performance information and low liquidity that often accompany these investments.
The combination of massive wealth transfer from baby boomers, a rising tide of greater wealth among mass affluent investors, product availability, and a challenging macroeconomic outlook is driving the pairing of individuals and alternatives. Liquid alternatives, private credit, and real assets such as timberland and agriculture are high-priority investment choices for both existing high-net-worth and emerging mass affluent investor segments. Wealth managers and registered investment advisors are well positioned to meet the needs of these segments as interest in alternatives grows. Partnering with a global investment firm with an established track record in operating across alternative markets is critical for long-term success in navigating the complexities of the alternatives landscape.