Consultants increase discretionary assets to answer investor demand

Investment consultants are investing more money with discretion with alternative money managers as their clients, including institutional and wealth management investors, clamor for alternative strategies to pump up diversification and returns in difficult market conditions.

Industry players said their businesses have changed dramatically in the past few years as investors increasingly want to hand over the oversight of portfolios composed of multiple alternative money managers running complicated investment strategies, including private equity, private credit, real estate, infrastructure, sustainable investments, and co-investment and secondaries funds.

Investment consultants said their discretionary management of both commingled and separately managed alternative investment strategies also are commonly used as building blocks within OCIO assignments, which has contributed to the growth of their funds.

They also report that asset owners of all sizes from the largest to the smallest public and corporate pension funds, insurance companies, endowments and foundations are investing in their funds.

"The blocking and tackling of overseeing alternative investment portfolios is pretty onerous for asset owners," said Stephen Nesbitt, CEO of alternative consultant Cliffwater LLC, Marina del Rey, Calif., in an interview.

Mr. Nesbitt noted that consultants are obliging by "providing commingled alternative strategy portfolios for smaller investors and separately managed accounts for larger investors in order to keep their business."

Investment consultants have been playing a balancing game over time between their traditional portfolio advisory duties and discretionary money management.

"The dynamic between discretionary and advisory has morphed over the years. The trend toward advisory with institutions investing directly has ramped up over the past 15 years," said Jason Schwarz, president of Wilshire Advisors LLC, Santa Monica, Calif., in an email.

More institutional investors are using consulting services from Wilshire "as well as utilizing discretionary management (by Wilshire) in segments of the market that are difficult to access, difficult to (perform) due diligence (on) and/or are difficult to source," Mr. Schwarz said.

For example, in traditional private equity investing, some asset owners continue to invest with managers on the advice of their consultant, retaining discretion, while also investing in a separately managed account or commingled fund of funds managed by Wilshire with discretion, that "would be difficult to build directly with or without a consultant," he said.

Wilshire managed a total of $97 billion in discretionary mandates, of which $4.6 billion was invested in private market strategies, as of Dec. 31. Assets under advisement across all strategies totaled $1.2 trillion as of the same date.

Over the past five years, Wilshire had an increase of 250% in the alternative investment assets it oversees for clients.

Assets managed by Wilshire with discretion for institutional investors in the U.S. and Europe increased by 85% over the past five years, driven by private equity, private credit and alternative yield — structured credit and direct lending — mandates, Mr. Schwarz said.

Wilshire also is seeing demand for alternative investment strategies within its financial intermediary client base, "driven by demand from high-net-worth clients," Mr. Schwarz said.

Wilshire may see a 20% increase in investment in alternative mandates this year, Mr. Schwarz said, given the firm's new business pipeline.

Like Wilshire, other investment consultants are seeing more inflows into their commingled and separately managed alternatives funds.

For example, Mercer Investments LLC, New York, closed its most recent commingled multiasset fund — Mercer Private Investment Partners VI — with $4.8 billion in the fourth quarter of 2021, an increase of 78% over the prior fund in the series, a news release said.

Clients in the fund include public and corporate pension funds, insurers, endowments and foundations, the news release said, but did not identify investors.

Alternative strategies in the fund include private equity, private debt, infrastructure, real estate, co-investments, secondaries, credit dislocation, and a new diversity, equity and inclusion strategy.

"In a lower-expected return environment, asset owners and fiduciaries are likely to have a much tougher time achieving their financial objectives going forward," said Raelan Lambert, global head of alternatives, in the release.

"Our PIP solution pools client purchasing power to achieve better diversification, providing flexible access to compelling private market opportunities in a cost-effective manner," Ms. Lambert added.

Mercer's size gives the firm clout to save on fees and access to high-performing alternative investment managers, said Michael Forestner, an Atlanta-based partner and global co-CIO of private markets, in an interview.

As of June 30, Mercer invested a total of $26 billion with discretion with alternative investment managers for clients and had assets under advisement in alternative strategies totaling $164 billion.

Portfolio liquidity is an issue for asset owners now, Mr. Forestner said, noting that Mercer's investment team can customize a portfolio of alternative investments that will provide more liquidity, including private equity with more flexible redemption terms for investors.

Mercer's assets under advisement totaled $17.3 trillion as of June 30, while AUM was $415 billion as of Dec. 31.

The move by consulting firms to provide their clients with alternative investment commingled funds and separate accounts managed with discretion has flipped the business equation for some firms.

"The traditional breakdown for investment consultants was 80% advisory and 20% discretionary management, but that's changing," Cliffwater's Mr. Nesbitt said.

Cliffwater's core business remains in consulting with U.S. institutional investors across alternative investment asset classes, Mr. Nesbitt stressed, but he noted that the firm decided to distribute its alternative multimanager funds in the wealth management channel with a focus on registered investment advisers.

Cliffwater launched two commingled registered '40 Act funds beginning with a diversified direct lending fund in 2019 and a specialized credit fund in 2021. Investment in the funds is restricted to qualified investors.

"Wealth management is a step up from retail and those companies need both advisory help and funds that can accept smaller allocations," Mr. Nesbitt said.

Cliffwater's AUA totaled $99 billion as of Dec. 31, and AUM was $8 billion.