Everyone seems to be talking about private market investing - "alternative investment" - these days. A need for advisors and clients is having good seats at the table and being educated about the benefits and traps that arise.

As alternative investments such as venture capital, private equity and credit are becoming more visible and talked about, it is becoming much easier to tap into these fields.

A word that comes up time and again these days is “access.” Once the preserve of pension funds, sovereign wealth funds and the biggest family offices, “alternatives” are said to be getting more “democratized,” and technology platforms are a big part of why this is happening. Ticket sizes don’t have to be as big if groups of investors can aggregate quickly to combine their buying power; it gives them the ability of a large institution to negotiate on price. 

One such organization making a dent in this particular universe is CAIS, a US-based investment platform providing access to (and education on) alternative funds and products. CAIS has offices in New York, Los Angeles and Austin.

As with other tech-driven business, its model has benefited from the pandemic’s acceleration to digital and virtual communications platforms.

“The number of financial advisors putting alternative investments into portfolios for the first time is skyrocketing,” Matt Brown, CAIS chief executive, told Family Wealth Report in a recent call. 

CAIS has recently doubled in size as a result of a $50 million equity investment from Eldridge, the Greenwich, CT-based private investment house. It has more than 110 employees; it expects to double again in the coming year.

Alternative investment is the main place where “Alpha” and serious active management can be found, he said. 

“Traditional asset management has largely disappeared. The 'new active' is alternative investment.”

The reasons for the rise of alternatives are familiar: ultra-low/negative interest rates have crushed yields on listed stocks and government bonds; fewer firms are taking the IPO route and more are staying private; and the illiquidity premium that comes with private market investing is a clear attraction. Knowledge of these areas is growing. ALTSMARK, a US software solution firm for the private capital sector, earlier this year said that more than a third of registered investment advisors could be put out of business within a decade if they don’t include alternative assets in their clients’ portfolios. Private market investments - such as private equity and credit - have exploded 30-fold from 2000 to $30.5 trillion today.

Brown said there has been a 67 per cent year-on-year rise in total transaction volume on the CAIS platform: alternative investment funds and products; the number of advisor firms/teams transacting on the platform has surged 75 per cent; those transacting via CAIS for the first time has skyrocketed 149 per cent; and the number of funds traded has risen 95 per cent.

Brown said there are still cases of advisors who have not yet advised clients about these asset classes, or put them into such areas. However, that is changing fast. “Of those who are using alternatives, the percentages in a portfolio are also going up at a fast clip,” he said.  

An important task for wealth managers and their clients has been showing how alternative assets sit alongside the rest of their investments. Being typically less liquid (although not always), client reporting has been a challenge. There are firms such as Canoe, Private Client Resources and FundCount, working in the space, which remains a big growth area. Another firm in the space of building access, meanwhile, is iCapital, a New York-based group that has been forging alliances with a group of banks and wealth managers, and expanding into Europe, Asia, and other parts of the world.

Brown discussed how CAIS’s use of custodians enables the platform to show clients what their investments are worth and be “above the line.”

“Historically, major custodians would not recognize or represent a client’s alternative investment holdings on client statements. Advisors would have to get their client’s holdings from each individual investment. This is not scaleable, especially for an RIA firm,” he said.

“CAIS sought to change that and make it operationally efficient for financial advisors and their businesses. Through CAIS’ integration with the three major custodians, Fidelity, Schwab, and Pershing, alternative investment holdings are now seen on client statements, also known as 'above the line reporting,'” Brown said. 

He sees CAIS as an open arena, giving autonomy to those who use the business platform, while creating an overarching structure. In that sense, he said, it resembles modern businesses such as AirBnB or Uber.

The business serves RIAs, multi-advisor platforms and independent broker-dealers and regional banks. The numbers do a lot of the talking: since inception, CAIS has processed more than $13 billion in total transaction volume with more than 4,200 advisor firms/teams as members who oversee more than $2 trillion in network assets. 

The development of blockchain technology – distributed ledger tech most commonly associated with bitcoin – can help address reporting inefficiencies, as well as privacy and security, Brown added.