“Alternative Investments will become a core part of client portfolios”

The alternative investments industry has skyrocketed in recent years and is projected to grow to 18 billion dollars in 2026. Lawrence Calcano, CEO of iCapital, a provider of digital solutions to the industry, believes that these assets will become “a essential part of investors’ portfolios, due to its potential for diversification.

The North American fintech, whose main shareholders include big players such as Blackstone, KKR and Carlyle Group, already has US$157 billion in assets on its platform, whose technology is also developed in Portugal. In 2022, iCapital opened an office in Lisbon where it could reach 300 employees over the next two years.

Lawrence Calcano compares the technological community of the Portuguese capital to Silicon Valley and points to the overlap of working hours with the east coast of the USA as one of the advantages.

It would be interesting to start by explaining a little bit to our readers why has investment in private equity and alternative investments been growing so much in the last years?

Advisors have been allocating to alternatives for many years to diversify their clients’ portfolios and potentially generate better risk-adjusted returns.

We’ve especially seen this in the past year when the public markets were so tough. The traditional 60/40 portfolio hasn’t really worked. There’s a significant opportunity for investors to create opportunities for potentially higher returns and at the same time more diversification in the portfolio. And we’ve seen that with respect to the 60/40 portfolios, where there are a lot of correlations.

When things got tough in the markets, it damaged a lot of those portfolios. So people are finding the benefits of alternative investments from both perspectives — the opportunity for incremental return and the diversification of the portfolio. Investors are looking for that growth to meet future obligations they have in their life, whether it’s family opportunities or it’s retirement. The difference is, in the past, individuals just haven’t had access to alternatives to do it. We’re permitting that.

So through its platform, iCapital has been enabling asset managers and wealth managers to broaden the scope of clients that can invest in alternatives. We’ve been seeing this kind of democratization. You expect it to continue into the next year?

If you look at what’s happening right now, the markets are challenging and people are naturally more conservative during these periods, as they should be. But many advisors are telling us they want to be ready to begin the allocation to alts. We’re seeing a lot of advisors saying this is the exact type of market, which makes them wish they were fully allocated already to alternatives because then the portfolios would have had more diversification. They probably would have handled the changes in the market more effectively and more defensively.

What are the advisor’s and investor’s concerns?

It’s more around the liquidity of the portfolio than whether they’re regulated or not. It’s whether investors understand that these assets are illiquid, and they won’t have access to their money. That’s probably the biggest thing that people are focused on when they look at whether these assets make sense for them.

For those who can manage the illiquidity of these assets relative to stocks and bonds, they provide a lot of diversification and protection. And some of the strategies provide, we believe, significantly excess returns and that’s an opportunity for investors.

Looking at the big picture you don’t see this push into alternative investments causing trouble in the future?

A lot of the reasons why people would like to invest in these assets is because they better protect the portfolio. I think there’s an opportunity to improve how their portfolios behave across different market cycles, whether the markets are strong or whether the markets are challenged. But again, they have to understand how the assets work and they have to understand the liquidity characteristics of these assets.

Financial Times published recently a view from the Editorial Boards with a question in the title: Will the bubble in private markets hiss or blow? What is your opinion?

It’s good for people to be skeptical. It underscores what I was saying before about education. If I were a financial advisor and I was looking out for my client’s money, I would be very focused on understanding how the assets work and how they will affect my client’s wealth over many different market cycles. There are some people who would need more frequent liquidity than these assets might provide, and that’s okay. But for those who can manage the illiquidity of these assets relative to stocks and bonds, they provide a lot of diversification and protection. And some of the strategies provide, we believe, significantly excess returns and that’s an opportunity for investors.

So you expect a hiss not a blow?

The market’s already hissing, you know, today. You see the flows have slowed down a lot, given the conservativism that people tend to operate during challenging times in the marketplace. But as I said, many advisors are now preparing themselves for when the market stabilizes to increase the alts allocation for their clients. On a global basis, we’re seeing wealth managers and other types of advisors getting ready for a more stable market and putting in place the technology and the capability to offer these products to their clients.

Assets like private credit and real estate are more vulnerable?

In many respects, they are more interesting. We’re seeing many people very interested in private credit because on a lot of those investments, the interest rates float. In times of higher interest rates, the product’s underlying interest rates go up. The client is somewhat naturally protected from interest rate rises. On the equity side, probably the biggest area of interest today is in secondaries. In secondary equity you’re investing much later in the lifecycle of the investment and the duration, so the length of the investments is shorter. That’s very attractive and their returns are very strong as well. Pricing in the secondary market when the markets are tough tends to get better for the buyer and that’s obviously also good for the investor. We’re seeing credit and secondaries really leading the charge in terms of people’s interest over time.

When the deposit base shrinks, then you’re unable to lend. And so there’s been a big opportunity for people who manage private credit assets to step into that breach and provide credit to borrowers.

 

Do you believe that the financial instability that we’ve seen in regional banks in the US may have passed now?

I think it has stabilized a lot. Several institutions obviously ceased to exist, which is unfortunate in many of respects. There’s still some concern out there for sure, but given how various financial institutions have been protected by the system or acquired, and the way regulators globally are figuring out how to manage these situations more effectively is creating more stability in the marketplace.

Some analysts are saying that this will also push more companies into private credit. That’s also your view?

What’s happened is a lot of the lenders in the U.S. have pulled back. When the deposit base shrinks, then you’re unable to lend. And so there’s been a big opportunity for people who manage private credit assets to step into that breach and provide credit to borrowers and so forth. It’s going to continue until the banks start to aggressively lend again.

iCapital has developed a technological platform that enables asset managers and wealth managers to better manage the investments in private equity and other alternative assets. What is the value proposition of the platform?

There are several essential pieces to the equation. The first is education. The second is access. Many of the best managers have not been available to advisors and their clients in the past. Making those managers available is a big part of the value proposition, but not only available, available in investment sizes that make sense for an individual portfolio.

What are the amounts?

In some cases, as low as US$25,000, and in some funds the minimums are US$100,000. Many of the funds that we provide access to have institutional minimums of US$5 million or US$10 million. Even for a very wealthy person, you can’t commit that much money to one fund. And so, by creating the ability for people to invest at much lower levels, they’re able to incorporate these assets into their portfolio in a sensible way that allows them to create diversification in the portfolio. And owning these assets is really enhanced by the automation we provide. Automating the actual documentation you sign when you invest, automating the processes of calling capital, making distributions, redeeming, getting the reporting, the whole lifecycle. That’s a very important part of the equation as a lot of the wealth managers don’t have the ability to keep hiring more and more people to manually process these investments. The automation helps advisors succeed in offering these assets to their clients. We are now managing US$157 billion in assets across the platform, US$30 billion of which come from investors who live outside of the United States.

Making managers available is a big part of the value proposition, but not only available, available in investment sizes that make sense for an individual portfolio. In some cases, as low as US$25,000, and in some funds the minimums are US$100,000.

 

What new features may we expect on the platform?

One of the really exciting, important features of what’s coming next is around building a tool, which allows an advisor to work with their client to understand the actual implications of an alternative investment in their portfolio. Historically, the way people buy alternatives is based on the manager’s track record. And that’s a really important point because in alternative assets, the difference between the top quartile managers and the fourth quartile managers is massive — it could be a thousand basis points. In other words, getting into the right managers in this asset class is absolutely critical, so we’re building tools for advisors to help their clients choose top quartile managers that help reach their objectives.

In how many markets is iCapital now operating?

We have 13 offices, of which half are in the United States. Half are outside the United States. We serve all of the U.S., Europe, Asia, Latin America, the Middle East, Australia, and Canada. We continue to grow very significantly outside the United States.

Are you planning on opening other offices in other places?

We expect to open an office in Japan, and we will continue to open other offices around the globe over time. We’ve got ambitious global growth plans, and we expect to open offices to support that.

Lisbon is the largest office outside the US.

We are supporting all of our business from Lisbon. A very significant number of developers and engineers here are building technology that’s not just used outside the U.S., it’s also used inside the U.S. So this is a global development center for us as a firm.

You have office space for at least 250 people here in Lisbon. When do you expect to reach that number?

Probably in the next year or two. By using a combination of in the office and virtual, we can probably get to 300 with the space that we have here.

The team has done a great job building strong relationships with the government and the leadership here in in Lisbon. And we want to support what we view as a Silicon Valley community here in Lisbon.

 

Are you already selling iCapital services to Portuguese banks?

We just finalized the regulatory process to distribute our products in Portugal and will make them available to wealth managers and their clients soon. Besides the development center in Lisbon, we supported Web Summit here last year. We will support it again this year. We also collaborate on a variety of programs with the universities here.

The team has done a great job building strong relationships with the government and the leadership here in in Lisbon. And we want to support what we view as a Silicon Valley community here in Lisbon. Developing that community is in everybody’s interest. And certainly, in our eyes as we continue to recruit development talent.

 

So you believe Lisbon has the potential to be a sort of Silicon Valley?

We totally do. That’s why we keep adding people here because we think it’s a great marketplace for us. We have a series of meetings, with various people, the ambassador, leadership of the city, and various ministers of different departments. We’re excited to be here and part of this community.

Besides talent, what other features help make Lisbon an interesting place to invest as a technology hub?

The U.S. and Portugal have an opportunity to do more together, in part because half our day overlaps. When you walk through the offices in New York or as I did yesterday here in the morning, you’ll see people on Zoom calls with their counterparts either in Lisbon or in the U.S. You can grow in a collaborative way because people can actually work together during part of every single day. It’s also easy for people to fly over the ocean and be together. Culturally, to be able to interact provides a richer experience for people.

We’re also sending people over here to live now. Just in the last few weeks, we announced three senior people moving to Lisbon and also to Hong Kong and Singapore, because we think having people cross offices is a great thing from a cultural perspective. The people moving here have been with iCapital for four, five or six years and so they bring a lot of history of the company over here. We view culture as a competitive advantage to an organization.

iCapital has a lot of big names like Blackstone, KKR, and Carlyle Group as its main shareholders.  Do you continue to feel the full support of these shareholders, even through these turbulent times?

Absolutely. We have shareholders who are both general partners, who manage the assets, and we have shareholders who are wealth managers, who have advisors and clients. Part of what we’re trying to do is bring together an ecosystem of people who work collaboratively. We want to work in an automated way together, not in a manual way, so we are bringing the whole ecosystem together. And they’re very supportive. When you look at the chief investment officer allocations at these various large wealth managers, they have alternative assets that are 15, 20, 25% of client portfolios. I would argue that if your allocation is 25% to an asset class, it’s not an alternative. It’s actually a core part of the portfolio.

Over time, people are going to stop thinking about these assets as alternatives. They’re going to think of the private markets as a core part of a client’s portfolio, and both the wealth managers and the general partners want to see that happen. While the market’s tough today, to your question, everybody is optimistic around the role that these investments will play and how they’ll become a core part of client portfolios.