Distribution of Alternatives - Technology and Democratization

Ford Smith , Mercury iFunds, Executive Director
Edward Kuhnel , Mercury iFunds, Chief Administrative Officer.

Ford Smith and Ed Kuhnel are part of the iFunds team at Mercury Capital Advisors, focusing on distribution and administration, respectively.

Technology is prepared to bring significant disruption to the distribution of alternatives.  Traditionally alternatives managers raise capital from large sophisticated investors through a series of in-person meetings and information exchanges.  Private Wealth investors have looked from afar as access to high-quality managers is limited by a sales effort concentrated on large institutions.

Frequently a leading alternatives manager hires a placement agent, arranges road-show events, schedules follow-ups and DDQ meetings.  In the ideal outcome over 15-18 months the manager raises a $500MM fund from an anchor investor, a collection of other large investors and rounds out the fund with several medium/smaller investors.  Translated to working hours this means over 175 initial meetings, 90 follow-ups, with an additional 40 DDQ meetings to assemble approximately 35 investors.  

A well-regarded small institution’s staff annually handles 300 manager meetings with the potential of making 15-20 investments to reinvest cash-flow/make portfolio adjustments.   Private Wealth clients, or other investors, are guided to a major bank's platform, pay 3%+ commission, and have limited ability to evaluate managers directly except attendance at crowded conferences.  For an industry proud of being cutting edge, why have these titans of investing not brought technology to disrupt this tired sales approach?

If “Digital Darwinism” exists, and technology can affect business process change, what firms have the infrastructure and processes to disrupt productively?  It will be those firms that have spent the last decade plus bringing together a broad variety of sophisticated investors and alternative fund managers.  Building digital platforms has never been easier, however the experience to discern the key items a manager needs to convey their essential skills with the useful information a thoughtful investor requires is the critical ingredient.  Technology has real potential to change this investment relationship including expediting the flow of subscription documents, underlying client information, and customizing analytics.  Combine these components and you find yourself broadening the investor base and democratizing the investment process into leading edge alternative managers.  

A broader base is good both for independent advisors and clients.  The investor desiring to follow research from Cambridge Associates [The 15 Percent Frontier], would consistently allocate 15% exposure to alternatives over time.  Cambridge research, over 30 years, concludes that this path helps increase portfolio returns, while dampening volatility.  For the independent wealth manager, competing on a level playing field against the very large private banks, accessing these alternative managers is important both for client returns and for building their own business.  Using technology, Private Wealth managers, and their clients, can access the same alternative managers alongside the world's largest, most sophisticated investors.  Expert third-party research provides investors the opportunity to increase their knowledge across a range of alternatives.  These information avenues provide clients with knowledge and confidence to make similar moves used by large institutions to enhance returns and reduce volatility.  

Constructing a diversified alternatives portfolio with minimum allocations of $100,000 per transaction makes leading edge managers more accessible.   Working with a firm that already ranks among the elite players in the space, possessing existing relationships with world class managers and sophisticated global investors, increases the probability of successful outcomes.  The ability to choose among various investment categories, select a manager, do increasing levels of diligence and then execute subscription documents, all through an digital platform, improves the process of making alternatives investments available to a broader universe of investors.