Here we go again.
I’ve been watching iCapital and CAIS for some years now, wondering whether these alternative investment platforms were going to become strict gatekeepers who would impose high standards on the opaque, illiquid investment products they’re conduiting to advisors, or if they would become ‘agnostic’ and promote everybody who wants to stick a hand in consumers’ wallets. Now, suddenly, I look up from this focus and realize that there’s too much money to be made from too many gullible investors and sales-focused advisors for anybody to have standards.
The basic idea behind alts, as I see it, is to create vehicles that would invest in more interesting areas of the economy than stocks and bonds. This could be startups, private companies looking for cash infusions, lending opportunities to companies that aren’t able to get traditional bank loans—and buying financial planning firms one at a time to roll up into a larger entity.
There’s nothing whatsoever wrong with the concept. Large institutions and ultra-sophisticated investors have the ability to ferret out opportunities in our complicated economic landscape, and most importantly separate the wheat from the chaff. The wheat is investments that have potential, run by honest, ultra-intelligent managers. The chaff is investment ‘opportunities’ created by people who (at best) aren’t very good at finding opportunities and have to move downscale to get capital to invest, or who (at worst) think it would be really cool to handle a lot of other peoples’ money and periodically stuff some of it into their own pockets. (My memories go back to the limited partnership era and, more recently, the non-traded REITs, where there were some pretty good investments initially before the hucksters caught on and destroyed billions of dollars of advisor client wealth.)
It looks to me like we have entered that transitional stage where the dealmakers become more numerous and worse—and the first sign of it is when people start marketing those deals to less wealthy investors. A sponsor can’t pass institutional scrutiny, so, hey, let’s go on a platform and raise money $5,000 at a time from less discriminating consumers.
I had been hoping the alts platforms would impose institutional (or astute investor) rigor on what they displayed to advisors, but honestly, I don’t see any sign of it. But much worse is trusted names like Vanguard and BlackRock are getting in the game, bringing, as one press release put it, ‘alts to the masses.’
To me, that means, at best, a dilution of opportunity (and, therefore, returns) as a flood of new money chases the always-limited number of interesting deals. At worst, well, imagine a bear market, people becoming disillusioned with traditional investments, and advisor clients demanding access to alternatives to those risky stocks that just went down 20-30 percent.
Many dually-registered advisors will give in to that demand, as so many did with non-traded REITs and limited partnerships before that. The new platforms will give fee-compensated advisors an ‘opportunity’ to give in to that demand as well. At this moment, I know of exactly one advisor who has the experience and expertise to recognize wheat from chaff, and zero broker-dealers who will even try.
And (I’m groaning as I write this) the SEC has recently decided that retail investors have been missing out on ‘opportunities’ to invest in private investment funds, hedge funds and private equity funds. New regulatory policies will make sure that hucksters, pretenders and scamsters, among others, will have the ‘opportunity’ to rake in unsophisticated investment dollars and create a future mess so large that it will make Bernie Madoff look like a blip in the night.
I’d like to write more about this. I know about one relatively small private alternatives program that looks legit and quite interesting (and not yet available to the public; stay turned), but I don’t know of any analysts who are doing deep research into the new deals that are showing up on the advisor-facing platforms.
If you do, please pass on their contact information, and I’ll turn their insights into a series of cautionary articles. Maybe we can stave off this next disaster-in-the-making, or at least keep advisors out of the worst of it.