The Tipping Point For Alts, With iCapital’s Steve Houston

The alts industry has grown enormously in the past two decades, as leading fintech firms have addressed major “pain points” to help widen alternatives’ appeal. So just how big is the alternatives industry, and how much bigger can it get?

Steve Houston, managing director & head of investment products at iCapital, joins the show to discuss how iCapital is helping to improve the “user experience” of investing in alternatives.

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Episode Highlights

  • Data on the tremendous growth of AUM in the alternatives sector (and the major tailwinds that are behind this growth).
  • Discussion about the major “pain points” of investing in alternatives, and how iCapital has helped to make the investment process a lot easier (especially for RIAs).
  • Insights on how non-US investors are using the iCapital platform.
  • The challenges of continuing education in the wealth management space (and one intriguing strategy that iCapital is using to reach the RIA community).
  • Market trends in the alts space, including one asset class that Steve believes will gain increased momentum in the next few years.

Today’s Guest: Steve Houston, iCapital

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast.” I am your host, Andy Hagans. And we have a tremendous guest for you today, talking to one of the most exciting companies in our space, frankly, a leader in our space, as well as one of the largest FinTech companies operating in the wealth management world.

So, joining me is Steve Houston, who is managing director and head of investment products at iCapital. Steve, welcome to the show.

Steve: Thanks for having me, Andy. Thank you.

Andy: So, you know, we have a lot of RIAs and family offices in our listenership, in our viewership who are already using the iCapital platform. But I’m guessing we have a few people who listen who either aren’t familiar with iCapital or maybe just aren’t aware of the breadth of products and services that you offer. So, could we just start there?

Who is iCapital? Who do you serve?

Steve: Yeah. We’re an alternative investments marketplace, and we are a B2B business, and we service wealth managers who represent private clients as LPs on the left and private asset managers or GPs on the right. And we have technology that has automated that connection between those two parties.

And we work with about 250 private asset GPs currently and tens of thousands of wealth management LPs, well, financial advisors who represent hundreds of thousands of individual clients.

Andy: So, the wealth managers and advisors that you work with, are they mainly RIAs, broker-dealers? Is it just kind of a mix of everybody?

Steve: It’s really a mix. It’s really a mix. We work very closely and partner with the wirehouses where they use our technology. They generally choose their own alternative managers that they want to work with. They have their own research teams, they have their own fund selection and curation processes, and they just use iCapital’s technology to automate the bringing together of their private clients into the alternative managers that they choose.

But we also work directly with the RIA community and with the regional broker-dealer community where they actually come to iCapital’s website and we have a curated list ourselves of managers that we work with. And it’s a living list, you know, where we’re bringing on new managers every month, private equity, private credit, private real estate, and hedge funds.

And so those advisors, you know, will use, again, our technology and our curation process and our research to help identify managers that they can populate within their client portfolios.

Andy: Absolutely. And, you know, more and more advisors, obviously, placing capital into alternatives. It, you know, grows a little bit year by year, and over the course of a decade, you know, looking back, it’s like, “Wow, this has really grown.” But at the same time… So, I’m checking my notes here.

And this is from an Economist article that I’ll make sure to link in the show notes. But “The Economist” said that as of 2020, the global private equity, AUM, had more than doubled in the past 5 years to $5.3 trillion. And that was as of 2020. So, sure it’s a lot more than $5.3 trillion as of 2021 because that was a huge growth year.

Steve: Yeah.

Andy: But “The Economist” says that less than 5% of individual investor assets were allocated to alts at that time. So, it’s crazy, but we had this huge growth of inflows into alternatives in the past decade. Was that mostly from institutional investors from…

Steve: Yeah. Definitely. Definitely. The pension, endowment, foundation clients, state funds and the like have been actively allocating the private equity for decades, of course.

And that’s what’s driven the bulk of the, you know, asset proliferation that you see in the private equity space, those $5 trillion that “The Economist” was referencing. The private client community is catching up quickly, though. And it’s interesting because a lot of the private asset managers are now turning their attention to the private client channel because the institutional channel, you know, is very well covered and, you know, there’s only so much more that a lot of these pensions and endowments and so forth can allocate.

So, the private client opportunity is tremendous. And the private client world is not new to private equity or private credit and private real estate for that matter. I mean, the wires in particular were introducing private equity managers and hedge fund managers two or three decades ago, but they weren’t huge numbers.

And the amount of financial advisors at the firms that were actually using the products, you know, and deploying them within asset-allocated portfolios was pretty small. All of that is changing, you know, right in front of our eyes. And a lot of the reasons it’s changing is because of how we and others have automated the process. It used to be a very, very difficult asset class to access.

Andy: Right.

Steve: Financial advisors are very busy. They have tons of choices. They don’t have a staff that’s, you know, focused on filling out, you know, limited partnership agreements and so forth.

Andy: Right.

Steve: So, it was an industry or a segment that was, like, ripe for innovation. And iCapital, you know, we’re not the only game in town, and others have kind of, I think, done a good job at stepping in and taking out a lot of the friction or the pain points in that process. And, you know, we often joke, you know, if the hassle factor outweighs the alpha, clients won’t do it.

And the hassle factor was kind of outweighing the alpha for many, many years and I think that equation is now turned.

Andy: Well, you mentioned clients won’t do it. I mean, advisors won’t do it either, right? If you…

Steve: That’s right. Yeah.

Andy: If you take a look at an RIA’s typical workday or workweek, you know, it’s not like 99% of the time they’re devoted to portfolio construction.

Steve: That’s right.

Andy: There’s so many other facets to the job and they just, frankly, I don’t think they have the time if it’s too hard.

Steve: I think that’s right. And the RIAs in particular as fiduciaries and running, you know, advisory business versus brokerage business, a lot of their client investment portfolios are more automated and, you know, they change things on the margin. So, you know, there’s a demand statement and a compelling case to be made to include alternatives in that asset allocation, but it has to really seamlessly fit in, otherwise, they just won’t do it.

The other thing that’s kind of driving the attention, though, is, you know, the traditional… This is kind of mentioned so frequently. But the 60/40, you know, portfolio has been challenged and particularly this year, I mean, it’s just…

Andy: I was going to say, this year, it’s been hammered. A lot of people don’t realize that those two asset classes can have significant drawdowns in the same year.

Steve: Yeah.

Andy: It might not happen every five years, but it happens.

Steve: Yeah. And not to the magnitude that it has this year, though, because the bond part of…the 40 part of the 60/40 has just gotten clobbered in a way that it wasn’t traditionally hit as hard. And sometimes it would be a hedge against what was going on on the equity bucket, but it’s been a double whammy and there’s a lot of interesting, less correlated investment strategies that the alternatives managers can deliver.

And so the advisors are adapting that more and more and more. And there’s also… And the technology helps and the automation helps, like, all the things that iCapital, you know, offers. There’s also been some interesting new products, new chassis, new vehicles that allow advisors to embrace the products then even more than they had traditionally.

And we can talk about that certainly.

Andy: But do you mean like interval funds or just different kinds of wrappers that are more appealing? Are they more appealing to clients or to advisors or to both?

Steve: To both. The interval funds and the tender offer funds, you know, you’ll see this with private equity, with private credit and private real estate, but they’re all, you know, broadly considered like registered 40 ACT funds, and with that, they come with an element of liquidity, but importantly they have other features like they’re fully funded.

There’s no drawdown or capital call concept. Most of them, if not all of them, are 1099s, they don’t deliver a K1. Most of them are evergreen. So, every month one can allocate towards them. And, you know, there’s… So, there’s like… The delivery mechanism of them is really great and it’s simplified.

A lot of advisors really find that appealing. There’s still lots of benefit in the private funds, what are referenced as 3C7 funds that have capital calls. I mean, you might…generally are getting a much higher potential for investment returns in those types of offerings, but they’re just a little bit harder to access. And there’s more mechanics, there’s more going on.

Andy: There’s a complexity tax that you pay. It’s interesting, you know, as a podcast host, I come at this from the LP angle, right? So, a lot of times I lack that kind of insider baseball knowledge of the alternative investment industry, but I get to experience it, you know, as the retail investor, the self-directed LP. And my pain point is K1s.

I’m at that, like, awkward spot where I’m like, “Oh, if I’m getting eight or nine a year, like, do I really want another K1 even if an offering is really attractive?” Part of me thinks, “I should just rip the bandaid off and be willing to get, like, 20K.” At some point, it’s just like, “Well, who cares?”

Steve: You know what? It’s funny. You’re not that different than a lot of, you know, larger clients where there’s that tipping point. You get one or two or three or four, and then it’s like, “Well, why don’t I just go all in?” But it comes with a headache. I was on the phone yesterday with my tax accountant and I sent him another K1 yesterday and he’s like, “Really? They’re still coming in?”

So, it’s as long as you can keep up with it. But, you know, the 1099, these evergreen registered, you know, interval and tender offer funds, they’re really gaining a lot of attention right now. And, again, there’s different flavors of them and different strategies, but it’s really kind of an interesting phenomenon that’s right upon us now.

Andy: So, I want to get to the pain points and the product segments, but one more question about tailwinds. So, you know, we’ve seen these institutional and endowments, you know, I might say an average allocation to alts is whatever, 25%, 30%, you know, somewhere in that range, 20%, 25%, 30%.

And a lot of them are there, right? So, they’re just… As they age out of a particular investment, they’re going to place capital in another investment to, you know, stay even with that allocation. So, is the tailwind from institutional? I mean, is that kind of phasing out, would you say?

Steve: I think a little bit. And there’s this whole numerator-denominator phenomenon right now where the denominator, you know, has dropped so much with public equities and bonds and, you know, the nav of the private asset funds, those pensions and endowments hold hasn’t gone down as much. And so even their allocations that the pension, endowment, foundation space, it’s a little bit out of whack right now where they… It’s funny because in the last five years they were allocating so much to private equity because they were catching up.

Like, every year they were underweight. Every year they were underweight because the public equity markets were just booming. Well, suddenly it’s just been turned on its head in the last 9, 12 months. And so… But you have none of that, really, none of it with the private client community. I mean, The Economist article that you mentioned referenced that, you know, the private client world is allocated less than 5% and that is right.

It’s somewhere between, you know, 3% and 4%. When you include the entirety of the private client world, you know, once you get into the high net worth segment, it’s much, much north of that. In fact, in many cases, it looks like pension and endowment allocations. But that’s where the tailwind exists because as the advisors who are managing traditionally 60-40-ish types of portfolios that they tilt to 50-30-20, you’re talking about a massive amount of wealth that can transition into alternatives.

And it’s not just private equity. Again, it’s real estate and it’s credit. And it’s a super trend that, you know, again, it’s pretty phenomenal to be able to watch that, you know, over the next decade how that plays out.

Andy: Yeah. I do think the rebalancing question, that one is interesting to me because the fact that these are, you know, mostly illiquid products in the alternative investment space, like, take private equity real estate, I’m like, “Well, you know, even if you haven’t written down that investment, it probably did more or less move pretty closely with the public markets or it’s going to.”

So, I think that one’s a little misleading. Do you have any insight into how advisors deal with that?

Steve: Well, it’s a great question and we look at it all the time. I was just looking at some navs that were published by some of these registered evergreen private equity funds yesterday. And some of these funds are producing positive results this year. And it’s kind of like, wow, that’s pretty impressive, you know, with what’s going on in the public equity market.

But there’s a bit of a lag effect with respect to the holdings there, for sure. So, you have to be mindful of that. And as you’re allocating towards those funds in today’s market, and we really like a lot of these funds by the way, but, you know, there could be some nav weakness in these funds because they have a lag reporting.

And so, you know, one just needs to be really aware of that. But, again, the beauty of those is you can allocate to them every month. And so if you’re going to lag into a private equity position for a client, you know, you don’t have to just dump it all in one month, you know, you can allocate as you go. With the credit and the real estate funds, there’s a little bit more transparency in the valuations. There’s also an income or a cash flow component of those types of offerings.

Andy: Sure.

Steve: The non-trading REITs and the BDCs. They’re really great products. They are a great way to allocate into, you know, private credit instead of just buying high-yield bonds or corporate credit or treasuries or munies. The private credit segment is really interesting as is the private real estate market. And there’s benefits and enhancements to just traded REITs, you know, public REITs.

So, you know, it’s… There’re a lot of really good offerings out there, and then it just comes down to educating advisors on which ones they might consider using.

Andy: Yeah, absolutely. I mean, I think you’re right. The performance has been surprisingly good. And, you know, one interesting thing, you know, we were talking about pain points and iCapital really has been a part of the, you know, industry, the movement to remove some of those or reduce those pain points.

But I think another factor, I had Stacy Chitty from Blue Vault on the podcast a couple of episodes back. And we were talking about how some of these products, the non-traded REITs, the BDCs, you know, the 2022 version of those products seems to be fundamentally better, a better deal for investors, better returns, more transparency, just frankly, better value proposition than they were 20 years ago.

So, I think that’s a really important piece of this.

Steve: It’s definitely the case in the non-traded REITs.

Andy: Yeah.

Steve: The private credit, the BDC product is a little bit newer, actually, but the non-traded REIT circa 20 years ago that you referenced, similar strategies that you have today radically different fee paradigm for clients.

And they weren’t getting a very good deal, frankly, many years ago. There was huge placement fees and so forth. And the industry went through quite a revolution a number of years ago where that… to the point you just made, today’s version, the 2022 version of the non-traded REITs is very transparent, it’s priced very effectively.

It’s constructed in a way that, you know, any of us should feel very, very comfortable, you know, investing in.

Andy: Absolutely. So, how about the other pain points? I mean, what would you identify as an area where iCapital has really just made this stuff so much easier than it was 10 years ago?

Steve: So, there’s different… If you ever look at kind of the life cycle of investing in alternatives, there’s the beginning piece around subscribing which was always, you know, traditionally stacks of paper and yellow stickies. That’s all been eliminated. And, you know, we’ve helped accelerate that, but there’s some others as well. But, you know, once you’ve allocated to a private equity fund, for instance, it doesn’t just, you know, end there.

There’s capital calls. There’s distributions. There’s fund updates. There’s extensions. There’s a lot that goes on during a life of that fund. And being able to automate the flows of that information, and importantly, being able to work with the financial advisor so that he or she and staff can know where to find the information in a seamless digital way is really what, I think, certainly our company has focused on, it’s that entire life cycle.

And so for clients that come to us, again, we just work with financial advisors, but we try to deliver a full end-to-end solution. It’s not just the upfront electronic SubDoc, you know, piece, which is really important, but it’s that plus everything that comes after that. I think that’s helped us a lot and what’s kind of given the financial advisors comfort. And, you know, the other thing is like a lot of financial advisors that we work with, you know, you can essentially load up your clients, you know, into our infrastructure and you can build portfolios across those clients.

You’re not having to constantly go back and update new client information and so forth. Once they’re in there you can toggle between different types of funds and, you know, there’s really great document repositories and things like that. So, you know, the ecosystem that we provide for financial advisors I think is what’s really been kind of the breakthrough, to be honest.

Andy: Yeah. It’s interesting in talking about the ease of use there. So, you know, any sponsor, any issuer could, you know, close an investor, close capital, get the check, but you have to look at that total life cycle and investor experience because if it’s a good experience with good communication, you know, they’re more likely to come back and invest in the next offering or the next fund.

Steve: That’s right. And they want an environment that’s familiar to them. And so, you know, I think that’s what’s made a big difference. Especially the RIA community, again, they’re running fee-based advisory portfolios and they like this kind of lather, rinse, repeat cycle where there’s a familiarity in terms of the documentation, where it’s discovered, how performance is represented, where they can find the performance.

Does it flow through to the custodial account so that everything is represented accurately on client statements? Again, it’s not just about introducing a really interesting fund and making that subscription document process easy. Again, very important, but it doesn’t end there. That’s just where it begins.

Andy: Sure.

Steve: Right.

Andy: So, you know, thinking about… Given what you said about an advisor being able to log into the platform and there’s all these types of funds, you know, interval funds, hedge funds, private credit, private equity, I mean, it seems to me that having that kind of size and reach and breadth is actually really important because if I’m an RIA or even a family office, I don’t want to have to use and interact with 25 platforms, even 10 platforms, you know, if I don’t have to.

So, you know, frankly, I think iCapital’s size is part of the value that you offer. And I have this press release that’s from February, 2022. And normally, you know, press releases are press releases, but this one had some really interesting data. So, it said that over the course of 2021, iCapital grew the client assets that the company services to $108 billion, which was 59% year-over-year growth.

Like, that’s bananas. It’s rare to see a company that’s already, you know, as large as iCapital have that kind of a growth rate in any given year. So, that being said, is iCapital the largest alts platform in the world?

Steve: Yeah. I can’t think of anyone that would come close. And we’re probably going to end the year close to $150 billion, you know, in assets that are managed through the iCapital platform. And, you know, we have 1000 employees now as well.

And now we’ve branched into some new investment product segments, namely, structured investments through a couple of acquisitions that we’ve done. But, you know, the size, I think, does matter. About 300, 350 of the people that are part of our company are technologists. They’re the ones that are writing the code that automates the technology and the operational infrastructure…

Andy: Sure.

Steve: …for us. And, you know, we have to make sure that, especially for the RIAs that work directly with us, that we always have a robust menu of choices as well. It’s one thing for them to come to us and use our technology, load up their client data, but, you know, you have to have good choices and refreshed choices and diversification. You don’t want to just hang your hat on large-cap, you know, buyout-oriented private equity.

You need to have a robust menu of real estate offering, so, a robust menu of credit offering, so, a robust menu of hedge fund offerings so that once they’re in…

Andy: So, do you all have a team that’s researching and vetting it? I mean, it’s not like a build it and they will come, just working with the largest guys. Are you actually vetting or finding, you know, making sure that your menu is beefed up, so to speak?

Steve: Yes. Yes. I’ve got a team of about 20 due diligence and research analysts, and they are constantly working, you know, with our user base and introducing new ideas, soliciting feedback, publishing lots of research around different client segments, sharing with the advisor community where they see trends, you know, the types of things that we like right now.

And that all informs ultimately the managers that will originate and put onto our platform. And so it’s a very big team. They’re very prolific with their research content and they’re regularly in the field, you know, interacting with financial advisors.

That’s been critically important to us. And I think also having that in-house. You can outsource research. There’s lots of great research firms out there.

Andy: Sure.

Steve: But just having it in-house, I think has made, frankly, our service model that much better, you know, where advisors regularly call and they want to talk to a subject matter expert and, you know, that just happens in a very seamless way.

Andy: That’s interesting. Well, on that note, I think if you look at the alternative space, especially the past couple of years, we’ve seen these inflows into literally every segment. I mean, correct me if I’m wrong, but private credit, hedge funds, non-traded REITs, BDCs, interval funds, private equity, private real estate, it really has been a rising tide that lifts all boats, I mean, at least from what I’ve seen from all the data that I’ve seen.

Do you think this is going to continue just, you know, the tailwinds for alts, in general, are going to lift all these product segments or, you know, are there a couple that you think really, you know, are going to punch above their weight, I guess, in the next couple of years?

Steve: I think there are… And actually, interestingly, I think it’s private equity, and I’ll explain why. The private credit and the private real estate segments are the ones that grew the fastest. And those were kind of, like, phenomenons in and of themselves in a very low-interest rate environment.

So, you had these kind of new asset classes that private clients traditionally did not have access to. Plenty of options at the corporate bond market, high-yield bond market, muni-bond market. Very, very few options in the private lending or private credit space. Same on the real estate side. Good public REITs, not a lot going on in terms of, you know, core and core plus and even value-add real estate for the traditional private client.

Those two segments, Andy, were the ones that grew the fastest. It wasn’t private equity. Private equity, we think, is the next category that’s going to have the most growth. And it’s partially due to some new innovations, again, in the chassis, in the way that private equity is delivered.

And a lot of it will be emphasized around these evergreen private equity offerings. And there’s some new funds that are being rolled out in addition to, I don’t know, there’s like 12 or 15 registered private equity funds right now that are getting good traction, but there’s some new versions even on the back of those that I think are going to help popularize and drive more attention towards the private equity piece of the alternative investment segment.

Andy: Interesting. And what kind of… What are the major strategies, I guess, that you see with those kind of private equity funds? I mean, obviously, we’ve seen the trend where a lot of high-growth private companies are just able to take more and more private capital and grow to just a tremendous size without having to IPO.

So, that was an opportunity for larger private equity funds. Is it that kind of a strategy or are we looking at, you know, leverage buyouts? I mean, what…

Steve: Well, it’s… Yeah, they’re going to be…they’re broad-based. And so a lot of the existing registered private equity funds they started by buying other funds, you know, flagship funds by some of the largest private equity firms out there.

And then once you get into that investment process, then one can get access to directs and co-invests that come out of those funds. And the pricing and the fees for those can be cheaper, much cheaper than just buying primary funds. And all that flows through to the benefit of the individual investors.

So, more and more you’re going to see, you know, directs and co-invest populating the majority of the assets in these newer registered evergreen funds versus those funds just buying primary funds from the big private equity managers out there.

And so it’s actually a better deal for investors. It’s more transparent, the fee paradigm is much more attractive, the reporting…

Andy: So, they’ve sort of… Sorry to interrupt, but these funds have sort of planted seeds with investments and then now as the companies grow that they’ve invested in, they’re just going to participate on subsequent grounds, but on enhanced terms.

Steve: That’s exactly right. And you’re seeing that. If you look at, you know, not only the existing ones that are out there, but some of the newer ones that are being launched, you’re seeing kind of the constituent holdings change where it used to be flagship fund 10 by, you know, world-class private equity manager. Now it’s SPV 1, 2, 3, 4, 5, 6, 7, which are the individual companies.

And the fees for those are a little bit different than the fees for the primary. And so again, it’s a better deal for investors.

Andy: It almost sounds like a late-stage venture capital type investing.

Steve: Yeah. Well, some of it is, but some of it is still, you know, large-cap buyouts. If manager X, you know, does a huge buyout of an industrial company that’s an established company, but these funds are getting better terms by participating in that deal versus participating in the upper level fund.

Andy: Got it. Okay. Okay. That makes sense. Back to this press release. You’re probably like, “Why are you citing this press release?” Well, it had good data in it.

I thought this was interesting that it quoted $24 billion in international assets. And I thought that was extremely interesting. I mean, so, you know, as an LP, and we talked to a lot of family office executives and RIAs, you know, they’re mainly dealing with very high net worth, ultra-high net worth type investors. And I’m always kind of preaching that a big advantaged alternatives is not only the portfolio diversification in the enhanced returns, but the tax benefits, you know, different products like DSTs and anything, you know, 1031, but qualified opportunity funds.

Obviously, in real estate, there’s all sorts of tax breaks. So, I thought this was interesting. To me, if I’m a foreign investor, I guess depending on where I’m a citizen or where I live, I’m probably not getting some of the tax benefits. So, are international non-U.S. investors who are investing on the iCapital platform, are they investing in U.S.-based funds?

Are they investing in…

Steve: No. It’s really offshore vehicles. It’s Cayman. It’s Luxembourg. We have a big Luxembourg platform, fund issuance platform at iCapital. So, there’s a different, you know, again, kind of a different legal chassis that those dollars are typically coming into. They’re typically not coming into, like, the Delaware.

They’re not, you know, Delaware limited partners, for instance. But that, I’d say about…yeah, roughly about 20% to 25% of our assets right now are from non-U.S. individuals represented by offshore financial advisors. And these are financial advisors in Asia, in the Middle East, of course, in Europe, and increasingly now more and more in Latin America.

And so they’re typically buying into either Cayman vehicles or in some cases Luxembourg vehicles. But that’s an exciting growth space. And we work with both managers that offer non-U.S. content. So, it could be a European growth strategy or an Asian buyout strategy, but oftentimes it’s, you know, U.S. funds that are doing, you know, U.S. growth equity, or U.S. buyout, or U.S. credit, or U.S. real estate, but they’re working with us to wrap that fund, that vehicle in a Lux chassis or in a Cayman chassis so that we can sell it into Singapore, for instance.

Andy: Interesting. Okay. Yeah. It seems like you all are on the forefront of this, but, really, the entire industry has just made so many advances with wrappers, right? It’s like the underlying assets haven’t changed that much, but just the wrappers are better, they’re easier.

Steve: It’s funny. It’s product development. And I mean, you have to have good content, make no mistake. Like, people aren’t going to allocate and believe in the alternative story if they don’t see the benefits of a return stream to their 60-40. But the wrapper matters, like, immensely.

And there’s constant product development, ways to make those wrappers more efficient, ways to make those wrappers and those funds more easily disseminated in different jurisdictions. And it gets really complicated outside of the U.S. I mean, even if you look at Europe, you can’t just say, “Okay. Europe is one regime.” It’s not.

The UK is a very different regime than the EU. And what goes on in Switzerland, there’s exceptions there, etc. And so each of those generally has to have its own wrapper in order to reach the widest audience as possible.

Andy: Interesting. Okay. So, you know, as, you know, the new tailwind, I guess, that we all think, at least, in the alternatives industry, is, you know, these retail investors starting to shift to a larger allocation to alt. And we’re seeing that already. Do you think that’s mostly, you know, very high net worth, ultra-high net worth individuals or is that trickling down to the, you know, “everyday accredited investor” who might have less than $5 million in assets?

Steve: And the accredited space is where the momentum is right now. If you just look at the QP market in the United States, there’s, you should know the answer to this, 3 to 5 million QP households in the United States. There’s, you know, close to 20 million accredited investor households in the United States.

And that cohort has generally never had access to alternative investments because there wasn’t a product set, there wasn’t a chassis, you know, that was delivering that in. And that’s where the product development is occurring and that’s where the fastest growing segment, for sure. And that’s frankly where so many fund managers, GPs, are laser-focused on right now, you know, as are we and others because there’s a huge opportunity, you know, to really drive that adoption.

And that’s what’s, you know, that 3% to 5% alternatives allocation that “The Economist” reference. That’s that cohort. They just haven’t moved up yet like the QP segment. The QP segment adopted alternatives 10, 20 years ago, longer, and they have higher allocations, but it’s a smaller population pool, much smaller population pool.

Andy: Yeah, that makes sense. And I guess if you’re looking at total assets, then, you know, that accredited segment, you know, in total investable assets, this is a huge, huge amount of assets. Let’s talk about education for a minute. So, you know, our audience at AltDB, you know, we’re talking with RIAs and family office executives who “get it.”

Right? Like, they wouldn’t be listening to this podcast if they weren’t already kind of invested into alternatives, but it’s still really surprising how many advisors, you know, they just…I guess they don’t have the time necessarily or maybe their clients aren’t asking for it. That would make sense as well. But I know that iCapital created AltsEdge for advisors to earn CE credits.

There’s even a certification, I think, in alts. So, I guess, to use a baseball analogy, if individual investors were in, like, the second inning maybe of awareness or maybe the third inning, where are financial advisors? Are they in the fourth or fifth inning of education?

Steve: Yeah. They’re in the fourth or the fifth inning. And I think that most individual investors are in the first or second at best. But, you know, the fact of the matter is so many individual investors, particularly those that have their accounts with RIAs, they’re not asking for alternatives, they’re not going to ask for alternatives. It’s the financial advisor that needs to kind of shift them in that direction, just showing them the benefits of a shift in asset allocation.

And so it’s the financial advisor that we at least focus on primarily in terms of education. And we have lots of education materials, including AltsEdge. It’s an accreditation program that we design with CAIA. And, you know, it’s fantastic. There’s a lot of great content.

But to be honest, it’s not like the silver bullet, it’s not the secret sauce. It’s… You have to find and understand how and where RIAs consume research and education. And you mentioned it a second ago, Andy, like, a lot of them just don’t have time. And so we’ve designed our education program around, you know, different types of ways to deliver that.

And oftentimes it’s short-form videos. It’s a five-minute segment on what a BDC is.

Andy: Sure.

Steve: Now, we’ve got an hour-long accreditation BDC segment and it’s fantastic and you get CE credits, which a lot of folks need. But let’s face it, there’s just not a lot of people there going to drop everything and take a BDC one-hour segment. But you can actually pack a pretty strong punch in a five-minute video tutorial that gives them the basic understanding, and then we can talk to them and we can show them different options and different features and things like that.

Andy: Yeah, it’s amazing. I mean, I think it’s one of those it’s a very human thing, I guess, to admit. I don’t know what that is, but in our industry, in the wealth management industry there are so many new products. You’re not an idiot if you don’t know what tender offers are or you don’t understand the nuances of an interval fund.

It’s okay to seek out that content.

Steve: Absolutely. Yeah. There’s lots of nuances. And I think that’s why, you know, having a trusted partner, again, where there’s other firms like ours that offer these capabilities and everyone, you know, is very focused on education, diversification and menu, service and so forth. But, you know, we have a lot of heft and not an advertisement at iCapital, but it matters. We can really surround advisors with lots and lots of resources to help this journey and this adoption process go a little bit more smoothly.

Andy: Absolutely. Steve, I can’t thank you enough for coming on the show. You’ve been very transparent, you know, about iCapital. And I think, you know, the fact that you’re investing so much in just really removing those pain points and, you know, thinking long term, making the life cycle of the investment, you know, a better experience, making the user experience better, I really believe that’s going to be the thing… that’s going to be the glue that, you know, makes that larger allocation to alts permanent.

Steve: Yeah. Well, we agree. And frankly, that was the thesis behind the creation of our company almost 10 years ago. It’s hard to believe we’ve been around 10 years, but I think it’s paying off and there’s some super trends that we’re delighted to be kind of in the middle of and just being the connective tissue, if you will, between the GPs on the left and the wealth management LPs on the right, I think, is really been a good strategy for us and it’s a good spot to be in.

Andy: Awesome. So, for the RIAs or family offices listening, if they’re not already using the iCapital platform, where can they go to learn more about it?

Steve: Yeah. Well, you can go to And, like, call me directly if you’d like. I’d love to have a conversation and talk about… I mean, we have representatives all over the country, of course, and they do a great consultative job. They’re not traditional salespeople. They really understand the RIA practice, the family office practice, and, you know, they lead with technology.

And the investment content is there, but leading with technology to make the process easier we have found to be the most important part of the equation.

Andy: Absolutely. I love that. So, for our viewers and listeners, we’ll be sure to link to The Economist article that we referenced, the press release, all the resources we mentioned. I’ll be sure to include those in the show notes that you can access anytime at Steve, thanks so much for coming on the show today.

Steve: It was a real pleasure. This flew right by, Andy. Thanks for having us. We really appreciate it.

Andy: Thanks.

Andy Hagans
Andy Hagans

Andy is a co-founder of WealthChannel, which provides education to help investors achieve financial independence and a worry-free retirement.

He also hosts "WealthChannel With Andy Hagans," a podcast featuring deep dive interviews with the world’s top investing experts, reaching thousands of monthly listeners.

Andy graduated from the University of Notre Dame, and resides in Michigan with his wife and five children.