This year has been marked by news of investors trying to snatch back billions of dollars from retail-focused private credit funds that their wealth advisers had invested in on their behalf.
Much of the coverage centers on questions about the health of the vehicles’ underlying loan portfolios and whether the liquidity limits of the fund structures are suitable for the fickle timelines of retail investors. Far less understood is how registered investment advisers actually source, evaluate and buy into private fund opportunities.
In most cases, wealth advisers funnel client money into fund strategies by choosing from about a dozen digital intermediary platforms that serve as a crucial avenue for the $20 trillion private fund industry’s large-scale efforts to raise capital from affluent clients.
Operators of these behind-the-scenes platforms wield outsized power in determining how individuals get access to private markets.
Structure to scale
“If you talk to any investment manager, any wealth manager and any GP, and you ask what’s the No. 1 challenge on getting alternative investments to scale, they’ll tell you it’s having a structure that allows it to scale,” said Jeff Yabuki, CEO of InvestCloud, which bills itself as the largest fintech platform for managed accounts in the US.
Depending on their size and sophistication, wealth advisory firms rely on the platforms in varying ways. Some are used as marketplaces to distribute alternative investment products to advisers, while others are more focused on the less glamorous but critical tasks around things like fund subscription, record keeping and administration.
Still others are effectively advisory firms serving the higher end of the wealth market. They specialize in manager selection and standing up proprietary feeder funds catering to ultra-high-net-worth clients, many of whom prefer an institutional-grade investment experience rather than the retail-focused semi-liquid vehicles that have dominated the news about the wave of redemptions from private credit funds.
What they all have in common: They sit at the intersection of alts and the wealth channel, using financial technology to bring the two worlds together.
And the world of registered independent advisers by itself is vast and fragmented, with nearly 19,000 wealth-focused RIA firms in the US alone, according to Cerulli Associates, a research firm covering the wealth management industry.
“The operational complexity, due diligence burden and minimum investment requirements of investing in less than fully liquid alternatives have pushed wealth managers to work with retail access platforms that help streamline access,” said Daniil Shapiro, director of product development at Cerulli. “Even the most sophisticated wealth managers often need assistance to offer their advisers and clients access to a full suite of product at scale.”
Leading the cohort of alts marketplaces serving this market is iCapital, a privately held powerhouse with a roughly 80% market share, Cerulli data shows. In addition to its platform for advisers to shop for products from fund managers, New York-based iCapital provides education, manager research and an array of back-office support for administrative supervision of client investments. Trailing behind iCapital are CAIS and Subscribe, which mainly target institutional investors.
$3.7 trillion in 2029
High-net-worth individuals make up a lucrative and growing source of new capital for private fund managers. Some $1.9 trillion of their wealth has been allocated to alternative investments, and that figure is expected to rise to $3.7 trillion by 2029, according to Cerulli.
But the operational processes underlying that opportunity have long been dogged by cumbersome, outdated workflows such as distributing fund products, onboarding small investors, managing their portfolios and wrangling documentation.
“If you’re going to build out an infrastructure that efficiently and technologically enables easier access to alts, you need to make sure you’re tapping into a very large opportunity set,” said Don Calcagni, chief investment officer of Mercer Advisors, “because it is a heavy lift as an organization—from a fintech integration platform perspective, from a process engineering perspective.”
According to PitchBook data, investors have deployed over $530 billion into evergreen funds, mostly through vehicles tailored to private wealth investors. The largest funds on the market are run by alternative asset giants like Apollo, Blackstone and Cliffwater, all of which have big teams working to drive sales through national wealth management firms, private banks and regional brokerages.
But smaller fund managers often rely on getting shelf space at the big marketplaces as a way to be seen and considered by wealth advisers.
This is where platforms like iCapital and CAIS are powerful gatekeepers. They determine which fund products to distribute through their own websites and white-label portals custom-built for advisory firms. Using these sites, wealth managers typically choose from a menu of funds that their own firm curates based on a larger set of funds previously vetted by iCapital, CAIS and other intermediary firms.
Due diligence
Denver-based Mercer Advisors, a national wealth manager, mainly works with CAIS, along with iCapital and some smaller competitors. CAIS selects fund managers in part using third-party research performed by the consulting giant Mercer, a Marsh-owned firm with no ties to the Denver wealth manager of the same name.
Calcagni, who has an unpaid role sitting on the CAIS advisory council, said using outside due diligence to make these selections is an important differentiator that helps ensure an independent perspective on investment opportunities.
Intermediaries like CAIS and iCapital take a cut on all assets flowing through their platform, generating recurring revenue as a percentage of client dollars rather than through one-time fees. Those range from 10 to 15 basis points of a fund’s net asset value, according to a person familiar with the fees paid by fund managers.
The question of unbiased shelf space allocation is sometimes contentious in the industry. Subscribe, Opto Investments, Allocate and Gridline tout the fact they’re not compensated by fund managers, and they make a point of saying they aren’t in the marketplace game.
“We’re not an asset-gathering business,” said Rafay Farooqui, CEO and founder of Subscribe. “We’re a facilitating business, an operating system, and also our business model is software as a service.” And in SaaS fashion, Subscribe charges its customers for annual subscriptions.
Some executives of these firms said they don’t invest in funds managed by firms that own equity in their platforms. “We would perceive that as a conflict,” said Logan Henderson, CEO and founder of Gridline, a venture-backed platform that emphasizes advisory services and custom digital tools for wealth managers.
At CAIS and iCapital, many of their largest customers are also equity investors in the company, a fact that both companies acknowledge in their terms of service as raising a potential for conflict. Apollo and Hamilton Lane invested in the two companies while iCapital investors include BlackRock, Blackstone and Blue Owl. Last July, investors valued iCapital at $7.5 billion.
In response to questions from PitchBook, iCapital said in a statement that it doesn’t “charge for access to our platform,” though it collects various fees for tech and operational support.
“In certain cases, we also receive distribution-related fees from product providers, which is a longstanding industry practice and helps avoid passing additional costs to end clients,” the company said. “Product placement and visibility on the platform are not influenced by these fees.”
