The growing wealth among individual investors is leading to an increased interest in alternative investment strategies, including private markets. The gap between retail and high-net-worth investors is being filled by an emerging mass affluent segment, many of whom are seeking more sophisticated advice and products. A significant amount of wealth is expected to transfer from baby boomers to younger spouses, with private markets likely being the top choice for new products sought by wealthy individuals. This shift in wealth is expected to create a demand for alternatives among a broader range of investors.
Private credit has emerged as one of the fastest-growing segments within alternative assets in recent years. Nonbank lenders, such as asset managers, have filled the gap left by large banks exiting the market, leading to exponential growth in private credit over the past decade. Asset-based lending, a subset of private credit, is becoming increasingly popular among investors for its differentiated returns and diversification potential. Alongside private credit, interest in private markets as a whole, including real assets like timberland and agriculture, is also on the rise, with significant capital expected to be allocated to these investments by 2027.
The landscape of alternative investment vehicles is expanding to appeal to individual investors. New semi-liquid alternative vehicles, such as tender offer funds and business development companies, are emerging to bridge the gap between the historically closed-end structures of private markets and more familiar investment vehicles like mutual funds. These new vehicles offer investors increased liquidity and transparency, addressing key priorities for individual investors. Regulators have also made changes to give individual investors access to the benefits of alternatives, broadening the definition of accredited investors to include those with minimum standards of investment knowledge.
Market uncertainty and radical macroeconomic shifts have reinforced the role of alternatives within a diversified portfolio. Advisors are increasingly using alternatives to mitigate downside risk and protect against market volatility. While enhancing returns is not always a primary objective, in less volatile markets, it is expected to become more important once again. Hedging against inflation has also become a focus for advisors, with more seeking to use alternatives for this purpose. The demand for alternatives among individual investors remains strong, driven by factors like wealth transfer, macroeconomic challenges, and increased product availability.
Current retail allocations to private markets are estimated to be around 5-6%, indicating significant growth potential among noninstitutional investors. Liquid alternatives, private credit, and natural resources are high-priority choices for both existing high-net-worth and emerging mass affluent investors. While the alternatives landscape can be complex, partnering with a global investment firm with experience across alternative markets is crucial for long-term success. It is important to consider the risks involved with alternative investments, including the potential for substantial losses, less regulation than other investments, and greater use of leverage.
Overall, the rise of individual investors in the alternatives landscape is a result of a combination of factors, including growing wealth, increased product availability, and a changing regulatory environment. Private credit has emerged as a key growth area within alternative assets, attracting interest from investors seeking differentiated returns and diversification. With the expanding landscape of alternative investment vehicles and a focus on risk mitigation in the face of market uncertainty, alternatives are likely to play an increasingly important role within diversified portfolios for individual investors in the years to come.
