Thirty-four percent of financial advisors in a survey released Thursday by iCapital Network, a financial technology platform, currently have at least 5% of client assets in private equity funds and 27% have at least 5% of client assets in hedge funds.
Over the coming year, the majority of respondents said they planned to maintain or increase exposures to alternatives, motivated mainly by potential investment returns and diversification goals: 87% to private equity funds, 61% to hedge funds and 93% to private direct deals.
“This research shows that advisors recognize the potential benefits of investing in alternative asset classes,” iCapital Network’s CEO, Lawrence Calcano, said in a statement. “However, the ability to access high-quality alternative investments has historically varied widely based on the business model of an advisor, a finding evidenced in this research.”
The research involved some 450 respondents, 55% of which were RIAs, 29% independent broker-dealers and 16% wirehouses. Virtually all advisors had been in business for at least 10 years, and more than 60% for 20 years or longer.
Fifty-five percent had built practices with $500 million to $750 million in assets under management, while 34% were managing upward of $750 million, the latter group concentrated among the wirehouse representatives.
According to the survey, 77% of advisors allocated to private equity funds in client portfolios.
Two-thirds of advisors had less than 5% of client assets in private equity funds, but this was primarily driven by RIAs and IBDs, with more than 70% of each cohort allocating at this relatively low level compared with just 38% of wirehouse advisors.
Forty-eight percent of wirehouse advisors allocated between 5% and 10% to private equity funds, and 11% allocated between 10% and 15%.
Nine out of 10 advisors surveyed cited attractive returns as the most compelling reason to invest in private equity funds.
An outsize number of RIAs, compared with their wirehouse and IBD counterparts, also pointed to diversification and the unique nature of the investment opportunities as reasons to invest. The report said this may be related to the historically limited access to private equity funds within the independent channel.
As for obstacles to greater investment in private equity funds, 86% of advisors cited finding more appropriate clients, 61% high minimums and 53% illiquidity. Fifty-four percent of IBD firms and 49% of RIAs also cited ease of access.
Over the coming 12 months, 54% of advisors planned to invest the same in private equity, 32% more and 13% less.
“The majority of advisors we surveyed have incorporated private equity into client portfolios due to its performance in relation to public markets over longer-term periods,” Nick Veronis, co-founder and managing partner at iCapital, said in a statement.
“The characteristics of the asset class increasingly appeal to advisors who recognize the potential to promote a buy-and-hold discipline and to seek enhanced client returns amidst challenging market dynamics.”
Average allocations to hedge funds were lower than to private equity funds among surveyed advisors, according to survey data.
This echoed the latest report from the Tiger 21 peer-to-peer learning network, which showed that its wealthy members allocated 21% of their portfolios to private equity in the first quarter and just 5% to hedge funds.
Seventy-three percent of advisors in iCapital Network’s study allocated less than 5% of their assets to hedge funds, and 22% allocated between 5% and 10%. Wirehouses were more bullish on hedge funds than their independent peers, with 67% planning to maintain or increase investments; 54% of advisors planned to at least maintain their hedge fund exposure.
As with private equity, investment returns were the main reason for advisors seeking out hedge fund investments, followed by diversification.