Alternative Allocations: Evaluating Alternatives

In the latest episode of the Alternatives Allocations podcast series, I was joined by Patrick McGowan, Head of Alternative Investments, at Sanctuary Wealth Management. Patrick and I discussed advisor adoption, structural tradeoffs, due diligence and the increasing demand for alts. We discussed the importance of education focusing on the merits of the asset classes, and the tradeoffs from one product structure to the next. We compared investment structures: the traditional drawdown structure where capital is raised during a subscription period, and capital is called over time; and the perpetual structure (registered funds), where they are generally available, and capital is put to work as it is received.

As Patrick noted, registered funds (interval and tender-offer funds) are available to a broader group of investors, at lower minimums, and more flexible features. However, he also noted that certain strategies fit better into a drawdown structure as opportunities need to be sourced over time. The important thing is that advisors and investors understand the structural tradeoffs of the various options, and they determine which is most appropriate for their clients.

Structural Considerations

Patrick and I also delved into the importance of due diligence in evaluating funds. Patrick emphasized the importance of matching the objective of the fund with each client’s goals. He stressed the importance of understanding the underlying holdings, historical track record, and fees among other issues. Due diligence may be conducted by the home office, third-party providers, and/or by advisors themselves.

I asked Patrick where he saw the biggest opportunities in the coming year. He stated, “I do think that there is a lot of interest and there will be continued interest in managers in areas like direct lending and private credit and real estate lending. There are these huge opportunities, multi trillion-dollar opportunities for private lenders to get involved there.”

The bottom line is the alternative investment landscape is expanding dramatically, with more institutional-quality managers, bringing more products to the market across the array of strategies. Advisors should select the most appropriate options to fulfill their clients’ needs and goals.