Traditional asset managers may have a home advantage in distributing alternative allocations to advisers and retail investors, given their knowledge of this client base and their requirements. Once they have gained alternative investment capabilities, they can introduce price competition and provide client access to a wider variety of exposure and liquidity, according to a new study by Cerulli Associates.

Traditional asset managers have well-established distribution functions that can resonate with advisers and end-investors and are also able to offer extensive product support – possibly to the degree that some alternative investment firms neither can nor want to.

Additionally, they are familiar with economies of scale and fee compression – having proven willing to offer better pricing to capture greater flows and grow assets. “In the not-yet-fee-compressed private capital space, this is a tremendous advantage,” says Cerulli associate director Daniil Shapiro.

A critical decision traditional asset management firms will face when considering the addition of alternative allocations to their offerings is whether they should rely on internal capabilities, partner with other firms, or acquire capabilities. According to the study, 69% of responding asset managers plan to increase reliance on the acquisition of alternative investment firms, 64% plan to increase reliance on strategic partners or joint ventures, and 60% expect to hire or lift out professional teams.

Another key decision is that of the structure, especially concerning illiquid allocations. Where illiquid allocations are concerned, investors will need to identify the structure that best supports the product.

Cerulli’s research finds that advisers’ most significant challenges in allocating to the products include the lack of liquidity being unsuitable to the client (54% rate this as a challenge), as well as products being too expensive (39%) and overly complex (37%). Remediations may be a new wave of enhanced liquidity offerings, including non-traded real estate investment trusts and interval funds.

As the private capital industry matures to become a larger ecosystem, which is more important to retail investors, traditional managers will find an industry that allows them to play to their strengths in delivering alternative capabilities.

“Traditional asset managers can become formidable industry competitors versus existing incumbents, bringing welcome price competition and allowing their clients to more easily access a wider variety of needed exposures –  a strong case for the expansion,” Shapiro says.