Alternative Investments in Retail

[00:00:00] Speaker A: Foreign welcome to Perspective First, a podcast series by A&M's financial services industry group where we speak with industry leaders about the latest trends and hot topics within the financial services sector. I'm your host Gautam Ratnagar and today's episode is about alternative investments in retail focused on service providers and how they are servicing the retail products in the market. Joining me are our guest speakers Nick Ablani and Lance Christofferson from Ultimus Fund Solutions. Nick Lance, can you take a minute to introduce yourselves and say a few words about your firm? Sure. [00:00:42] Speaker B: I'm Nick Abelhani, head of our Retail Alternative Product offering at Altimus Fund Solutions where I focus on the strategic direction and continued enhancement of our retail alt service offering covering BDCs, interval tender offer funds, REITs and 34 ACT registered private funds. At Ultimates, we're a fund administrator providing full back and middle office support, transfer agency, fund accounting, fund administration, tax and compliance solutions and our retail alternative business consists of over 75 funds across 50 advisors and over 25 additional funds onboarding and going through the SEC registration process which really highlights the momentum we have behind us in the retail space currently. [00:01:26] Speaker C: And I'm Lance Kristofferson, Senior Vice President of Product and Strategy for the Retail Alternatives Transfer Agency, specifically here at Ultimas. Been in the industry 21 years, 16 of those years dedicated to all of those products, Interval funds, tender funds, REITs, BDCs 1031s and of course the new 3C7. [00:01:44] Speaker A: As I think we are excited to have this discussion here today, especially as we have continued to see the growth of alternative investments in retail. We see this projected to be a $30 trillion allocation by 2030. We observe significant market shifts at the moment with retail being a growth channel for a lot of the asset managers, both private as well as public managers diversifying into alternatives. We see a lot of purpose products being launched and perhaps aligning some of the liquidity and the client needs for the retail channel. And there's an increased focus from the industry servicing the retail channel. Perhaps Nick, you're in the intersection of capital deployment into the retail alts market. On the demand side, what are you seeing around the product wrappers and perhaps even the asset classes that has the highest levels of interest from the investors. [00:02:40] Speaker B: We sit at a unique vantage point where we're able to see it all. We see the capital being raised, the wrappers being launched, the operational plumbing being built and the redemption windows that are being tested. Private credit market has experienced significant growth which directly correlates with the growth we're seeing in the registered closed end fund space, which are our vehicles helping to fuel this growth in the industry. Within that, Evergreen Structures, vehicles with a continuous offering and a perpetual life like non traded BDCs, interval and tender offer funds. We've been a trusted source for our clients taking a consultative approach, helping them navigate product wrappers that they may be unfamiliar with. Working with both traditional asset managers looking to launch alternative products and alternative asset managers looking to enter the registered 40 ACT space, often for the first time. Through these innovative fund structures, we're seeing alternative assets continue to expand to the retail investor. With these vehicles, the investor is able to get the transparency and investor protections of an SEC registered fund while also gaining access to asset classes that were historically more difficult to access. When we look on the wrapper side, the standout is with interval and tender offer funds. The category has gone from a niche structure from a decade ago to one of the fastest growing corners of the registered fund space with over 300 total funds and around 300 billion in AUM and continuing to grow at a rapid pace. With over 50 funds currently in SEC registration. What's the appeal? With interval funds you have the investor protections of a 1940 act registered product, daily subscriptions, periodic repurchase officers 1099s instead of K1s and the ability to hold meaningful exposure to illiquid private assets. Also, by striking a daily nav, interval funds gain access to electronic ticketing through the nscc, streamlining trade processing, settlement and distribution across intermediaries, while reducing some of that manual operations, operational friction. The second wrapper drawing significant retail flows is non traded BDCs, perpetual life vehicles and direct lending. Due to some of the specific SEC diversification guidelines set for BDCs, they have to invest over 70% of their assets, generally speaking, in private or thinly traded US companies. They bring monthly NAVs and subscriptions, quarterly tender style repurchases, RIC tax treatment 1099s and the ability to use leverage with an asset coverage ratio requirement between 150 and 200% compared to 300% for interval and tender offer funds. If we look at the asset class side, the demand is concentrated in a few areas. Private credit is the clear leader attracting retail capital and the registered wrappers are where most of this retail money is landing. With private equity, retail access is growing a little more slowly and it's increasingly being delivered through secondaries. These strategies are oftentimes a better fit in a tender offer fund wrapper due to looser requirements surrounding NAV frequency and share repurchases compared to interval funds. Real assets including infrastructure and select real estate strategies are another area of strong demand. And lastly multi strategy and hedge fund like exposures where retail investors are effectively buying a diversified alternative sleeve in a single registered ticker. In summary, in the retail space we're seeing capital is flowing predominantly into interval tender offer funds and non traded BDCs with the dominant asset classes in private credit, private equity, real assets and I believe that the trajectory is accelerating, not slowing. [00:06:51] Speaker A: I think you hit on two things that we intend to cover a little later, especially around the private credit and the secondary space. But before we go there I think you have highlighted a key point that is the shift away from traditional drawdown feeder fund structures towards more evergreen semi liquid structures. What innovation are you seeing happen in the market around taking a look at the liquidity profiles and some of the meats of the investors in the past? I think Nick, you have also spoken about the 34 ACT funds. Can you tell us a little bit about what that is and what innovations do you see around that? [00:07:29] Speaker B: Yeah, so I'll take this from an angle of how we're looking at the evolution of these product structures. So we continue to take a close look at the operational, regulatory, tax and distribution requirements of each registered wrapper, something that requires constant monitoring in an ever changing regulatory environment to ensure that no service gaps exist and we're able to provide our clients with full end to end support regardless of which product wrapper fits their strategy the best. If we first just take a look at BDCs for example. BDCs and traditional close end funds. They both operate under the Investment company Act of 1940. But BDCs face materially different and substantially more demanding regulatory reporting framework similar to corporate registrants. While traditional closed end funds file annual and semi annual reports on Form NCSR, monthly end ports and annual NSN filings, BDCs are subject to a full suite of 30 Act SEC reporting including quarterly reports on Form 10Q and annual reports on Form 10K. To meet the requirements of BDC sponsors at Altimis, we've recently expanded our servicing capabilities well beyond traditional closed end fund administration. We've built dedicated BDC operational teams with deep experience in exchange ACT reporting where we provide full financial administration support for 10Qs and 10Ks, greatly reducing the administrative burden for asset managers that have previously handled all or a portion of these filings in house. We're also implementing best in Class technology solutions within our offering, leveraging DFIN's active disclosure to streamline the reporting process powered by system to system data connectivity to compress filing cycles and reduce manual handoffs. As an organization, we're also recognizing that retail fund structures are hybrid in nature and sit between traditional and registered products and and our private funds business. Our operating model allows us to effectively bring together the required systems and expertise from both areas instead of forcing a model onto any one particular side. So shifting into those 34 ACT funds that you had referenced, we commonly refer to them as either 34 act registered private funds or 34 act registered 3C7 funds, a structure that is relatively new to the market with just over 20 funds in the market today, but a structure that is gaining recent traction in the semi liquid evergreen product market. 30 forex registered private funds are private investment vehicles exempt from registration under the Investment company Act of 1940 that then voluntarily register under the securities Exchange act of 1934, which allows these funds to welcome an unlimited number of limited partners instead of adhering to the 1,900 doll cap on QPS required by traditional 3C7 funds. Once registered, the fund becomes subject to full 34 ACT reporting requirements, including quarterly reports on Form 10Q and annual reports on Form 10K. These funds are specifically designed for private wealth investors and are limited to qualified purchasers. Fund managers benefit from the ability to implement less liquid strategies, predominantly in private equity or infrastructure. In terms of what we're seeing today within a semi liquid wrapper. Operationally, 34 ACT registered private funds combine the need for registered transfer agency as a unitized fund partnership tax and accounting with K1 tax reporting and specialized financial and SEC reporting support. This requires administrators to deliver a blend of private fund accounting, exchange act reporting in an integrated service model, which is exactly what we've done combining our deep experience in both private and registered markets to deliver the comprehensive servicing framework required for 34 ACT registered private funds. [00:11:43] Speaker A: Thanks Nick. I think you're highlighting one of the key, I guess differentiator that I observe with Ultimas, but broadly a challenge in the market is bringing the public, you know, the registered site with the private market side. So maybe switching focus. Lance. I mean the TA is one of the critical components of the solution that needs to be delivered. Anything to add around this and what you're seeing in the market? Just generally. [00:12:10] Speaker C: Yeah, I mean you have to follow that philosophy all the way through. Right. So if you think about these product structures, Nick said it very, very well, they are convergence from the private and the registered. And what you've got is you've got registered volumes which require High capacity technology as well as experience to handle. When are those volumes gonna hit and how do you handle them? But you also have to have high touch customer service because these volumes are high net worth qualified investors. These are not usual retail investors necessarily. And the minor mistakes that you can get away with on a mutual fund with hundreds of thousands of trades are not the same mistakes that you can get away with on these products. We like to call it mining our Q's and T's and you have to focus on quality and transparency. You have to have high, high quality and you have to have a lot of transparency with the investor, with the rep and the advisor, the back office and importantly the distribution partners and meeting all of their expectations. If you don't have somebody in your camp that knows those key pieces, you're gonna run into a lot of trouble with your service partners. [00:13:16] Speaker B: Great. [00:13:18] Speaker A: Just keeping on the team. Lance, it's hard to ignore the media coverage. I think as Nick started with the private credit and evergreen structure, especially around the recent news around some of the redemption gating, et cetera. What are you seeing or what are managers asking of you from a TA standpoint and how do you actually provide that governance and capabilities for them to service their investors? [00:13:44] Speaker C: Yeah. So in a time like this, the most important thing, it's literally like I just said, the Q's and T's, right. Transparency is the most important thing. The advisors and the portfolio and the investors all want to know what's going on with these products, where's their in flight trade, are they going to get prorated, what's happening with them? So you have to have technology that provides that visibility into all those channels. And that's what we've been focused on from the investor level to our website that says, hey, these trades have been prorated all the way to the data files and APIs that we're feeding our distribution partners and our firm and fintech partners to ensure that they know when these types of events happen. They immediately know. Now in the industry, I think it's very much a keep calm and carry on to kind of quote that famous poster. We've seen this before. These products have weathered these storms and that's actually kind of the good story to focus on here is education and reinforcement on that. Remember back in Covid, not to bring up that time, but a lot of these interval funds went through those same challenges and almost every single interval fund, to say a bad word here, prorated, had gatekeeping, had that happen to them and almost every single one of them through diligence, smart portfolio management and managing that gatekeeping appropriately came out of it. And I think that's where a lot of these product sponsors are now is believing in their product, believing in the portfolio and saying hey, we're going to get this in the right place, keep calm and carry on. The returns of the products are strong. We think we're in the right place. But what it is doing though is it's driving a lot of questions. Are there other opportunities for liquidity? Couldn't we do secondary markets on intervals and tenders that maybe we never have? Can we do a monthly repurchase instead of a quarterly tender? Funds are looking at things like getting to more daily nav so that they get in a fund serve and have more frequent cadence. A lot of things are being evaluated on how can they change. But right now a lot of it is education and reinforcement. And then how are you going to handle the next couple of months because that's going to be critical for your product. [00:15:43] Speaker A: Very aligned with what we observe in the market at A and M as well. I know the real estate asset class with Evergreens went through a moment and they rebounded quite solidly with multiples return to the investors. Nick, any thoughts around this private credit strategy and the impacts around the asset strategy and product structuring on the surrounding asset classes? [00:16:08] Speaker B: There's certainly been recent headlines around BDCs and closing funds that have pushed the narrative about private credit and how it might may be showing signs of strain that's then led to increased redemption requests. I think we got to look at this from two different vantage points. I think the retail investors are often more sensitive to headlines and short term volatility and may interpret redemption limitations as a signal to exit. In contrast, institutional and high net worth investors who are more familiar with private market mechanics tend to view these same features as essential protections that preserve the long term value of the fund. Overall. Even with the increased redemptions, private credit is still leading the way year to date in terms of fundraising by asset class in the retail space. But what I will say is I've been having more frequent conversations about real estate and infrastructure, whether that's packaged in a REIT or or implementing those strategies within interval or tender offer funds. So we're keeping a close eye on whether we begin to see a shift in asset strategies and wrappers and ensure we remain operationally ready to meet market demand and our clients needs. [00:17:27] Speaker A: Great. Just drawing on what Nick, you had mentioned just specifically around the fundraising and the distribution into retail that continues to be a challenge with a number of alternative managers because they have historically not distributed into the channel or owned a wholesaler network. What are you seeing as some of the key enablers around bringing the connectivity between the wealth site to some of these managers in distribution? Lance, if I can call. [00:17:55] Speaker C: Yeah, absolutely. I think this is a. It's an important channel to focus on as you begin your journey on these retail alternatives, is knowing your distribution partners and knowing the direction that you're going to head because the relationships that you have are not necessarily the same. So we talked about that convergence. The private side, if you're coming over into more retail, you may have to build all new relationships on the retail side for an interval fund. Whereas if you're a mutual fund shop and you're coming over and rolling out a 3C7, you're going to have to build all new relationships on the alternative side of the shop. And both of them have very different technology as well as the gatekeeping requirements as far as the AUM and potential distribution requirements before you can get through their door. So it's really, really important that you speak to these back offices before you begin that journey and ensure that your product is lining up with where they're headed and understand what their operational requirements are. We see a lot of sponsors make the mistake of having the relationship conversation with a big firm or with a big distribution partner, but they don't have the operations conversation. And so they go and design a product with a bunch of legal language that relationship wise can be supported, no big deal. But if they haven't talked to that big clearing firm's back office, they've hit a snag because there's likely things inside there that they will or will not support. What we focus on at Ultimas is knowing all of that for you. We take that away. As far as what you have to do in a consultation perspective, we've designed our distribution team, our TA team and our administration team to work together and have relationships with each one of those firms and know what they need. So when you come to us and say, hey, this very large partner or wirehouse firm or fintech, I want to be on their books, we can tell you from A to Z where you have to be and what you have to do to get there. And a lot of these newer entrants into the market cannot. And that's important to note is you have to have that experience on both sides that Nick talked about with the private and the registered to be able to guide them depending upon which path they're going to take great. [00:20:09] Speaker A: Just switching gears a little bit and perhaps towards the final topic for us to talk through. We observe I think Nick, you raised the aspect around the second reason increased interest in retail. We see a number of platforms increasingly supporting secondary sales alongside initial fundraising rounds. How are you seeing the growth of the secondary markets for retail investors taking shape? [00:20:35] Speaker C: It's interesting to see secondary markets in particular. They always rise when you see proration hit or when you see some liquidity stress hit the markets. Right. And every single time there is somebody that comes in. Now historically secondary markets from an investor level have gotten kind of a negative connotation. I think with the newer entrants, the way the technology has gone there is a much healthier outlook at it as well as a much more positive connection between sponsors and secondary market providers on the opportunities that maybe those markets can provide for investors as well as for the market in general to move some of these assets around depending upon the experience with several new entrants. In particular focusing on two product structures that never really had a secondary market which were tenders and interval funds which we are definitely seeing people that are introducing tools into there to try to provide that same market structure that you saw historically on REITs and BDCs that have been in play for a long, long time. [00:21:33] Speaker A: Thank you for that. I think this session has been very informative around what you're seeing in the market where Altimus definitely plays and enables some of the asset managers. Thank you again for taking the time and joining us myself on this podcast. Lance or Nick, any final thoughts to share before we close for the day? [00:21:55] Speaker B: Sure. What I'll say I think the firms that win in this next chapter will be the firms that can credibly serve both sides of this wrapper convergence. Doing it under one operational roof with one technology stack and a unified and connected operating model. That's what we've built here and that's where we continue to invest. I think one of our biggest differentiators in the retail alt space is the product and operational expertise we bring to our clients. Taking a very consultative approach, helping clients and prospects navigate the nuances and complexities of retail alternative fund structures from early stage conversations all the way through onboarding and launch. Additionally, we're able to provide full end to end support for all retail alternative product wrappers our clients are looking to bring to market, eliminating the need to bring in additional vendors or administrators as they grow. So whether a BDC interval tender offer fund, REIT or 34 act registered private fund, we're helping asset managers scale and get their products to market quickly and efficiently. [00:23:07] Speaker A: Thank you again, Nick and Lance for your time. We at AM remain very bullish around the continued growth of alternative assets in the retail channel, primarily supported by changes in legislation to expand access to private markets within retirement, rise of secondaries and true diversification needs of the retail investor. We'll be back shortly with a future episode focused on another key player in this ecosystem. Thank you listeners for your time.