Private wealth is heading to alternatives—what’s driving it and where is it going?

1  Growth in wealth creates demand for sophisticated advice and products

High-net-worth and ultra-high-net-worth investors have long been active investors across the alternatives landscape, and this shows no sign of slowing in 2023. Alternative investments is a top priority for 49% of North American family offices, while 34% are planning to increase allocations to private credit.¹

However, as wealth across segments of individual investors increases, demand for alternatives is also growing more broadly. Mass affluent wealth is expected to grow 40% between 2020 and 2025, according to EY's report on understanding the future of advice. Forecasts are for this growth to represent the biggest disruption to wealth management in decades as the gap between retail and high-net-worth is filled by an emerging mass affluent segment, many of whom are interested in more sophisticated advice and products, including alternatives. At the same time, a massive transfer of wealth is under way as baby boomer men die and assets transfer to mostly female spouses, who are often younger and have longer lifespans.

By 2030, an estimated $30 trillion in investable assets—a figure close to the annual GDP of the United States—is expected to transfer from baby boomers, according to McKinsey & Company’s review of the U.S. wealth management segment. A sizable proportion of this wealth could end up in private markets as the top choice for new products sought by wealthy individuals. 

Expected growth areas in wealth management over the next decade

^{Source: McKinsey Global Wealth and Asset Management Practice, 2022.}

2  Private credit is one of the fastest-growing segments of alternative assets

Private equity, real estate, infrastructure, and hedge fund strategies have been the core of alternatives for decades and have innovated with new styles and investable markets. Liquid alternative hedge fund strategies, which include systematic trend and global macro hedge funds, attracted significant assets from investors in 2022. However, across the alternative investing landscape, it's the growing prominence of private credit that's generating considerable interest from investors.

Private credit has taken shape and matured in the 15 years following the global financial crisis as capital adequacy requirements placed on large banks caused many to exit the market in favor of a focus on large public deals and companies. Nonbank lenders, such as asset managers, quickly filled the gap and now dominate the segment, which continues to grow at a rapid pace. 

Rise of private credit
Assets under management ($ billion) 2010–2027 (forecast) by substrategy

^{Source: Preqin, April 2023.}

Asset-based lending is a subset of private credit that uses assets as collateral, and it’s increasingly drawing investors for the differentiated returns it offers to traditional fixed income and equity, as well as for its role as a diversifier to other private credit investments. It is a sizable segment with opportunities across diverse sectors, including residential and commercial real estate, transportation and aviation financing, corporate asset-based lending, consumer loans, and healthcare.

Large addressable asset-based lending market

^{Source: John Hancock Investment Management, Marathon Asset Management, L.P., 2022. For illustrative purposes only. Not reflective of any fund.}

Alongside increasing interest in private credit, interest in private markets generally, including real assets such as timberland and agriculture, is rising. An expected $1.3 trillion in private capital is anticipated to be allocated to private assets by 2027, according to analysis from alternatives data provider Preqin. Real assets are the most illiquid of alternative investments with long lock-up periods of often more than 10 years. Available only to qualified purchasers and institutional investors, real assets, including timberland and agriculture, are attractive for the potential for inflation protection, diversification, and uncorrelated returns.

3  Expanding landscape of alternatives vehicles

Although demand from individual investors for alternative investments has been strong and consistent over many years, one challenge has been a lack of investment vehicles that appeal, and are familiar, to individual investors. This is changing with new semi-liquid alternative vehicles from tender offer funds to business development companies (BDCs). Ultimately, the aim is to narrow the divide between private markets’ historical closed-end initial public offering structures and Investment Company Act of 1940 vehicles—such as mutual funds—which are familiar to retail investors. Liquidity and transparency are high priorities for individual investors, both of which are improved through new alternative vehicles coming to market. Regulators have also played a role, making changes that give individual investors access to the benefits of alternatives. In 2020, the U.S. Securities and Exchange Commission expanded the definition of accredited investor to include individuals with minimum standards of investment knowledge, broadening a measure that had been solely wealth based before.

4  Market uncertainty emphasizes a role for alternatives

Market uncertainty often drives investors toward alternatives for the potential of downside risk protection and we're seeing this in the way that advisors are reporting using alternatives. Reducing exposure to public markets has been the primary goal of 69% of advisors surveyed by Cerulli Associates, while around 66% state downside protection is their primary objective.

Given the focus on risk mitigation, less than half of advisors (42%) refer to enhancing returns as a priority in using alternatives. However, in less volatile markets, enhancing or differentiating returns is once again expected to emerge as a key objective for investing in the asset class. Hedging inflation has understandably increased in importance with 31% of advisors aiming to hedge inflation with alternatives, an increase from 19% in 2021, according to Cerulli Associates.

Appetite for alternatives shows no signs of waning

A confluence of factors is pairing individuals and alternatives, including massive wealth transfer from baby boomers, a rising tide of greater wealth among mass affluent investors, product availability, and a challenging macroeconomic outlook that’s upturned traditional asset classes. Current retail allocations to private markets are estimated to be around 5% or 6%,⁴ which gives a sense of the significant growth potential that exists across noninstitutional investors. Liquid alternatives, private credit and natural resources 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 equipped to meet the needs of these segments as interest in alternatives grows. But the alternatives landscape can be complex; therefore, partnering with a global investment firm with an established track record of operating across alternatives markets is critical for long-term success.