Eileen Duff is managing partner and head of distribution for iCapital Network, where she is responsible for sales, relationship management and investor relations supporting the RIA, broker-dealer, private banking and family office communities. Prior to joining iCapital, Eileen was head of alternative investments, North America at Credit Suisse, where she built and oversaw the origination and distribution functions for private equity, hedge funds, managed futures, real estate and other key alternative asset classes. Previously, Eileen was with Donaldson, Lufkin & Jenrette where she was responsible for global marketing in the private client group. She is a graduate of University of Delaware and holds FINRA Series 7 and 24 licenses.
I spoke with Eileen on April 27 at the Morningstar Investment Conference.
What is your background? How does iCapital fit in to the landscape of advisor solutions?
Thank you for the opportunity. Prior to joining iCapital II ran the alternative investments platform for Credit Suisse Private Banking. I was at Donaldson, Lufkin & Jenrette prior to CS . I got involved in alternatives initially in 2003, when I built out the CS alternatives platform, and ultimately led a team that was responsible for sourcing, originating, structuring and delivering alternatives to CS advisors and high-net worth investors.
Credit Suisse was an early equity investor in iCapital Network, and I was introduced to them in 2014. At that time, I made a strategic decision to leverage iCapital to bring efficiency and scale to the platform that I was managing. When CS ultimately decided to exit the U.S. private banking business, we sold a part of the Credit Suisse alternatives platform to iCapital. After the sale closed, I joined the iCapital team along with a number of my colleagues.
At iCapital our mission is to democratize the alternative investment asset class by bringing the highest quality alternative investments to a broad array of advisors and their investors.
By alternatives, we are talking private equity, venture capital and hedge funds.
Exactly – those vehicles across all the relative strategies, whether it’s real estate, buyout, different private credit opportunities or relative hedge-fund strategies. Traditionally these are products that have been available to qualified purchasers, those who have $5 million in investable assets in limited partnership form. We have just expanded the platform to include certain alternatives that are available to accredited investors, with a goal of democratizing the asset class, bringing on products that will allow more investors and advisors to participate.
Bob: How much capital from the advisor side is on your platform now?
We are currently overseeing about $2.3 billion in assets. We have over 1,600 registered users on our network, which is comprised of RIAs, family offices, individual qualified purchasers, broker-dealers, independents and the like. In total, that network of users oversees about $1.7 trillion in investable assets.
We look at that as our goal: How do we capture a percentage of those assets?
What is the advisor appetite for alternatives now?
It’s interesting. The appetite is fairly strong, probably more so for private equity than for hedge funds. Obviously, we’ve seen a tremendous bull run in equities over the last number of years. As a result, it’s been difficult to position hedge funds. Conversely, people recognize that if they are willing to give up some liquidity there is the potential to get outsize returns, and more importantly, uncorrelated returns by accessing certain private-equity strategies.
While the appetite is high, there is still a fair amount of education that needs to be done and that’s where iCapital comes in.
You mentioned uncorrelated returns. What are some of the classic characteristics of alternatives as compared to traditional asset classes?
Certainly diversification and non-correlation versus traditional asset classes are a key component of why someone would look to add alternatives to their portfolio. Generally these alternative managers are able to take advantage of certain strategies and inefficiencies that aren’t available in public markets. A big part of what alternative managers are doing is either employing strategies and techniques that aren't in the purview of traditional public market investing, or on the private side getting access to information that isn’t otherwise readily available through public sources or markets. Private Equity managers own their companies and thus have prefect information on them. They take advantage of that information to effectively generate returns by exploiting those inefficiencies that exist. That is a core concept of what alternative managers are trying to do.
What are some of the risk considerations or hurdles with selecting or implementing an alternative manager?
The biggest hurdle is the liquidity aspect. Investors have to be willing to live with a certain amount of illiquidity and for many that has been a big hurdle. Obviously hedge funds have traditionally offered a little more liquidity. There are certain structures to invest in that might provide greater liquidity, but traditional alternatives are illiquid and that has been a big hurdle for folks.
In response to that, iCapital has created a qualified matching system that will allow us to offer certain liquidity on the private equity products that we offer. However, because that is generally done in the secondary market, it can entail a discount.
Other hurdles include the fact that most alternatives are generating K-1s and many of those get delivered late. That’s always challenging for people, as is understanding the fees and the fee structures. Lastly, the reporting challenges are an area where iCapital has spent a lot of time getting integrated with custodians and the like to provide a higher degree of transparency. Certainly our proprietary technology solution enables us to provide much better reporting on these assets than people have historically had access to.
Are fees coming down? Is the traditional 2-and-20 fee being abandoned by more and more of these managers?
It is. Across hedge and private equity, fees are coming down, particularly the management fee. It’s quite common to see 1.5% or 1.25%. Obviously, some of the best managers are still charging 2-and-20. The performance fee is not likely to come down as fast, because managers view that as a true alignment of interests with their investors.
But fees have come down. One of the benefits of iCapital is that we’ve been able to offer these investments and get access to the highest quality managers at very low investment minimums, while charging very low access fees for that. Historically, a lot of these products have been available through the wirehouses and the like, which have charged higher fees just to give clients access. A part of our value proposition has been how we get the same access to the same quality of manager and do it at a lower price point.
In recruiting and trying to get the best managers on your platform, I would imagine that one of the concerns that they have is the liquidity issue. They are used to institutional investors who have very, very long time frames, and may be invested forever. How does that impact your ability to get those managers?
We’ve done a really good job of getting access to the highest quality managers and it’s due in part because of the founding partners of our firm. We have leveraged relationships in the general-partner (GP) community that have afforded us the ability to get access. We certainly get asked about our client base and whether or not we have a concern around liquidity. To date we haven’t had any investors default or have any issues with respect to liquidity.
Because we have created this qualified-matching system that is in effect a way for those investors that need the liquidity to access it, that should help us avoid having those issues in the future.
What are some of the more popular strategies on your platform?
Certainly anything that is yield oriented. The search for yield has been what everybody has been looking for over the last seven years and that trend continues. We are able to offer some interesting private-debt oriented strategies, less liquid than what investors can get in the traditional fixed-income markets, and thereby give them an increased yield without increasing the risk of the credit quality significantly. That tends to be quite popular.
I mentioned the bull run in equities. Our ability to get access to high-quality growth managers – those private-equity managers who we think, despite the bull run in equities, could still generate returns above and beyond what you can get in the equity market today definitely has broad appeal. Multi-strategy hedge funds are also popular. Despite some of the challenges that I described within hedge funds, advisors are always looking for good multi-strategy funds that have long-term stable returns.
What due diligence do you provide?
One of the advantages that our platform affords is the fact that we provide all of the due diligence that we do with each and every fund that we have on the platform. The team that’s responsible for doing the manager sourcing and the due diligence is second to none with respect to their backgrounds and their experience, having evaluated managers for over 15 to 20 years. They write reports for each opportunity that we make available. It could be a 15 to 25-page due-diligence report, which we then make available to the advisors and investors who invest in our funds.
Advisors have the opportunity to get to know and understand everything about the managers that we have assessed over the last weeks and months and how we have been evaluating them. We try to do a reasonable job of not only laying out that opportunity set, but also the risks associated with the strategy. How do we think the manager is going to mitigate those risks? We make sure that everybody understands that alternatives are obviously not without risk. Of course, if you can highlight what those are so that everybody understands them, you are in a much better place.
Out of every 100 managers who want to be on your platform, how many ultimately get accepted?
We probably see upwards of hundreds of private opportunities in a given year. Our team usually feels that 35 to 40 are really great opportunities for investors. We are only going to choose to raise capital on the private side for maybe eight to 12 of those, which means there are still a number that we think are interesting that we are happy to talk to investors and advisors about. But it’s a pretty small percentage that actually make it onto the platform.
How can advisors evaluate alternative opportunities, since it is a relatively new area compared to other more traditional asset classes? Are there key questions they should be asking?
This is really key to advisors’ experience – making sure they have the ability to do the analysis that’s required. Key questions would include understanding the fee structure, the liquidity, the pricing cadence and how often is it going to price and whether or not they are going to see that price. These are the things that most investors struggle with when they get invested in these opportunities. If there is a drawdown structure, how quickly is that capital likely to be called and what is the cadence for calling it? If it is a yield structure, when can they expect to receive the yield and how often is it going to be paid out. Ideally they would have the opportunity to review due-diligence materials so that they can understand the background of the team and understand the risks before they invest in these products.
I find that even with very astute advisors, if they have not had experience in the asset class, there are questions that may not get asked and therefore impinge on the overall experience. Understanding the structure and the fees is highly important, as is understanding the strategy, how concentrated it is and what exactly are they getting invested in.
Anything that you are investing in should be less correlated to the broader market than traditional asset classes, but depending on the strategy there will be some correlation. It’s nice to say that these things offer diversification and they are not correlated, but of course, it’s important in order to have the best experience to be able to look beneath the hood a little bit and understand exactly what the correlation is and what part of the market it is correlated to. That way you can look at your liquid portfolio and confirm that you are not over allocating to any one sector.
How would you position your platform against so-called liquid alternatives and what are the key trade-offs?
There was a big run in to liquid alts and then there’s been a bit of a drop-off. People are now trying to figure out how to get exposure in their portfolios. I would position our platform as the more traditional alternatives, which of course is going to mean less liquidity. But we should provide some benefits over liquid alternatives which would include the ability to take advantage of tools and strategies that are not available in a liquid-alternative format which should provide excess return over and above what a liquid alternative can do.
There’s a big debate around fees. The argument that liquid alternatives offer you the ability to get access to alternative strategies with a lower fee structure is an interesting one, because many of the liquid alternatives that came out post-crisis had very high expense ratios. Despite the fact that they didn’t have carried interest, the overall fees given the expense ratios were quite high relative to a traditional 2and-20 fund. That is something that advisors need to put a careful eye on and pay close attention to.
What is the overall goal of iCapital?
The goal of our business is to become the advisor desktop for alts and provide easy and efficient access to an asset class that has been hard to access for many, many years. We’ve built it in a way where we’ve taken the things that we know advisors and investors have struggled with and tried to solve for those in a way that makes their experience a much better one, and at the same time ensure that they are getting access to the highest quality managers that they can.
Eileen Duff is managing partner and head of distribution for iCapital Network, where she is responsible for sales, relationship management and investor relations supporting the RIA, broker-dealer, private banking and family office communities. Prior to joining iCapital, Eileen was head of alternative investments, North America at Credit Suisse, where she built and oversaw the origination and distribution functions for private equity, hedge funds, managed futures, real estate and other key alternative asset classes. Previously, Eileen was with Donaldson, Lufkin & Jenrette where she was responsible for global marketing in the private client group. She is a graduate of University of Delaware and holds FINRA Series 7 and 24 licenses.