Urs Palmieri, EY Americas and Switzerland Wealth & Asset Management Consulting Leader, discusses younger generations’ turn to alternative investments:
What does the term ‘alternative investments’ encompass, and why are younger investors interested in them?
It’s important to differentiate between the different alternative asset classes. There are traditional alternatives: direct investments into private equity, venture capital, private credit, and real estate. They have been around for decades. In recent years, the traditional alternatives have become more accessible through new product structures which provide more liquidity and lower minimums to invest — which is then also particularly appealing for younger, affluent and next-generation investors.
Traditional alternative asset classes allow next-generation investors to invest in more unique and exclusive assets, be it on real estate projects, private firms or businesses focused in areas like sustainability or infrastructure. The ability to make a direct impact with a single investment is a compelling advantage that public markets do not provide. And what we hear from our clients is that younger investors appreciate the opportunity to have more direct impact based on their personal preferences or convictions.
The other alternative asset class is the emerging or digital asset classes, including cryptocurrency, stable coins, or tokenized assets. In recent years, they have become more accepted, but those digital assets are not as accessible and established in traditional wealth management firms. Conversely, digital assets are accessible through new ecosystems or financial firms, which do offer broad access and transparency, but often attract more tech-savvy investors.
How can families that invest together reach consensus on whether and how to invest in these alternative asset classes?
Having some sort of optionality in your value proposition as a family office is very important.
When it then comes to agreeing on investments strategies, I believe common ground around values is an important foundation to reach consensus, and a mutual understanding around the characteristics of investment strategies is crucial.
It’s very important that family offices focus on engagement, education and financial literacy. Our broader analysis of alternatives reveals a significant gap in understanding the characteristics of alternatives. Achieving an understanding — when it comes to risk, when it comes to liquidity, when it comes to performance — can be complex, as these issues are diverse across the different alternative asset classes.
It is essential to understand the details of those investment classes and strategies to establish a solid foundation for evaluating whether they are the right choice.
What are the pitfalls of investing in alternatives?
As with any other investment, it is very important to understand what families and investors are investing in. A robust due diligence process is essential for identifying high-quality investments.
An important consideration is the difference in risk and liquidity. Being in public markets is highly transactional, allowing for quick entry and exit. In contrast, traditional direct alternatives often require 10- to 15-year holding periods. Those illiquid alternative strategies have just a much longer time horizon. That has to be understood and considered when it comes to personal goals and liquidity needs.
For traditional asset classes in alternatives — private equity, hedge funds, real estate, venture capital —innovation in the product structures innovation in product structures has led to the emergence of semi-liquid funds that offer greater liquidity.
Do you see some family offices using cryptocurrencies and other alternative investments as a way to engage next-generation family members?
The answer to that is definitely yes. There’s a great inheritance happening: A lot of wealth is going to be transferred to the next generation of investors. Wealth management firms are leveraging crypto and digital asset offerings as a feeder channel to engage with the next generation.
