Summary of Alternative Investing: Alts For All - [Business Breakdowns, EP.234]

Overview of Alternative Investing: Alts For All — Business Breakdowns, EP.234

This episode (host Matt Russell interviewing Josh Clarkson, Managing Director at ProSec Partners) examines the accelerating push to expand retail and retirement-account access to private markets and alternative investments. They quantify the opportunity, explain recent regulatory and product developments that enable broader distribution, compare the vehicles and strategies most likely to succeed in a retail context, and lay out the winners, risks, and practical implications for investors, advisors and asset managers.

Key takeaways

• Morgan Stanley analysts estimate roughly a $4 trillion AUM opportunity for large alternative managers if retail/private wealth allocations move closer to institutional levels.
• Institutions today allocate ~20–30% to alternatives; individual investors currently allocate ~2–5%. Moving closer to ~15–20% would represent massive flows.
• The initial and most natural on‑ramp for retail (including 401(k) plans) will be yield-oriented, income-producing private-credit and real‑asset strategies rather than high‑variance VC lottery tickets.
• Recent regulatory moves (notably an executive order to explore ERISA inclusion of private markets and no‑action letters clarifying marketing/506C rules) materially lower barriers to talking publicly about funds and distributing certain vehicles.
• Semi‑liquid product types — non‑traded BDCs/REITs, interval funds, collective investment trusts (CITs) and SMAs — are the main structures bringing alternatives to retail and retirement channels.
• Fees will generally be higher than liquid products because private strategies require more origination, structuring, legal and operations resources. Investors should focus on net‑of‑fee results.
• The winners are likely to be large, multi‑strategy managers with strong credit franchises and broad distribution, and those who invest in brand, education and advisor outreach.

Background & regulatory context

• Big regulatory catalyst: a recent executive order directing ERISA/retirement policy to examine adding private markets to 401(k)/DC plans — this pulls the topic into mainstream retirement policy discussions.
• Marketing/solicitation rules: clarifications (no‑action letters) around 506B vs 506C make general solicitation (506C) easier to use, enabling managers to publicly announce and market funds more readily.
• Historical context: securities regulation and retail protections grew out of 1930s-era reforms. Semi‑liquid private products have existed for years (non‑traded REITs, closed‑end funds, etc.), and modern private‑wealth offerings (BREIT, BCRED, etc.) scaled in the last 5–6 years.

Product types, strategies and where demand will start

• Retirement/401(k) fit: most discussions focus on adding private exposure into target‑date funds (likely via SMAs or collective investment trusts for better cash‑flow matching), not standalone private equity picks on a 401(k) menu.
• Yield-oriented strategies (most natural early demand):
  • Direct lending / private credit (senior loans, asset‑based lending)
  • Structured credit and syndicated loan strategies (can provide more liquidity sleeve)
  • Real estate and infrastructure (income and inflation hedge characteristics)
• Higher‑return but higher‑variance strategies (PE, VC) are being packaged (funds of funds, tender offer vehicles) but will primarily target wealthier/sophisticated segments first.
• Product wrappers:
  • Non‑traded BDCs: required to hold ~70% in private loans to US companies; often include liquidity sleeves and can use leverage.
  • Interval funds: 40 Act registered, broader asset flexibility, mandatory periodic repurchase windows (liquidity rules are non‑waivable).
  • Non‑traded REITs, closed‑end funds, SMAs/CITs: used depending on asset class and distribution channel.

Distribution, marketing and who’s best positioned

• Biggest advantage: scale + credit capability. Large alternative managers (Blackstone, Blue Owl, Apollo, Brookfield, Oaktree, etc.) can both build products and afford widespread branding/education.
• Partnerships are forming between distribution platforms (401(k) providers, wirehouses, RIAs) and alternative managers; execution and alignment will determine winners.
• Brand and media matter in retail — general solicitation (506C) allows managers to publicize launches, build awareness, and accelerate flows.
• Smaller/mid‑sized specialists can still win by owning a niche and demonstrating superior, repeatable net-of-fee performance, but they face higher marketing and distribution hurdles.
• Platforms and large RIAs will have easier operational and back‑office integrations; small advisors may struggle to offer these products seamlessly.

Risks, failure modes and mitigants

• Misunderstanding liquidity: semi‑liquid products limit redemptions (e.g., quarterly repurchase windows, 5% NAV limits). Investors must reconcile liquidity needs with product features.
• Mis‑selling & education gap: many advisors and retail investors lack fluency in private markets; manager education programs (Alts Academy, firm universities) and advisor CE are being pushed to close the gap.
• Idiosyncratic failures get amplified in headlines: examples cited include First Brands and Tricolor, plus publicized issues like BREAT in 2022. Clarkson emphasizes those were not representative systemic private‑credit failures (many financed in liquid markets or involved fraud), and semi‑liquid products generally behaved as designed.
• Fee opacity or excessive fees: fees are higher by design (more expensive operations). Focus should be on net returns, not headline fee levels alone.
• Concentration of winners: the scale driven advantage may concentrate flows into the largest firms, possibly limiting opportunities for smaller managers.

Practical advice / action items

For individual investors:

• Understand liquidity tradeoffs before allocating: treat these as longer‑term allocations, not substitutes for emergency cash.
• Focus on net‑of‑fee historical performance and manager track record rather than headline yields alone.
• Use retirement accounts (tax‑sheltered) where appropriate — long‑horizon, penalty barriers help control liquidity risk.

For advisors:

• Get trained — leverage manager educational platforms and require due diligence on product wrapper, fees, liquidity mechanics and underlying assets.
• Match client liquidity needs and risk tolerance carefully; document client suitability.

For asset managers:

• Invest in brand, media and simple educational content; leverage 506C to market and build trust.
• Build or partner for distribution and back‑office capabilities to scale to retail/401(k) channels.
• Ensure clear product design (liquidity sleeves, repurchase mechanics) and transparent disclosures.

Regulatory / industry considerations:

• Continued emphasis on investor protection, disclosure and enforcement (FINRA arbitration for mis‑sales) will be important as access expands.
• Industry education initiatives and advisor CE are likely to be primary tools to prevent widespread mis‑selling.

Who stands to win (summary)

• Winners:

  • Large, multi‑strategy alternative managers with strong credit platforms and distribution (Blackstone, Blue Owl, Apollo, Oaktree, Brookfield-style scale).
  • Mid‑sized managers who can bring differentiated, repeatable strategies and build a consumer/specialist brand.
  • Platforms and large RIAs/wirehouses that can operationalize product flows into retirement accounts.
  • Retail investors who are properly advised and gain access to higher‑return, income‑oriented strategies.

• Losers / disadvantaged:

  • Small asset managers without scale or marketing budgets.
  • Small advisors/RIAs unable to absorb onboarding/back‑office complexity.
  • Investors who are sold illiquid products mismatched to their needs or who focus only on headline fees instead of net outcomes.

Notable quotes & framing

• The $4 trillion figure: "a pretty big number" — Morgan Stanley estimate for AUM growth opportunity if retail allocations approach institutional levels.
• Allocation gap: institutions ~20–30% in alts vs individuals ~2–5% today.
• On product design and investor understanding: "You are trading liquidity for lower downside risk, potentially better returns."
• On marketing rules: 506C no‑action letter "lets them talk about the fund while it's in market in deep levels of detail" — important for brand building.
• On fees: "Fees are gonna be higher, full stop" because private strategies require more origination and structuring.

— End of summary.