Shannon Saccocia, CIO of Neuberger Berman Private Wealth, has spent her career in wealth management, serving high-net-worth and ultra-high-net-worth clients. In her role, Saccocia works with clients to understand and define the asset allocation that best fits their investment approach. She spoke with Crain Currency about the ever-changing landscape of alternatives and how she speaks to her clients about the space.
The definition of "alternatives" has changed. What has that evolution been like, in your opinion?
The evolution of the word “alternatives” has gone through various stages over the last three decades and in some ways has come full circle. The term really grew out of a need to define investable assets that didn’t fall neatly into the three main categories of cash, equities and fixed income but over time took on additional attributes: illiquid, tax-inefficient, active, opaque and expensive, to name a few. In some ways, the term became more about structure than diversification. And the implication was that the more complex, expensive and exclusive a strategy was to access, the better it was. Changes over the last five to seven years, however, have moved away from a focus on structure, fees and access. Investors are more focused now on how to incorporate less liquid, more inefficient assets in their portfolios, to enhance returns or limit risk — or perhaps both. Increasingly, investors are also considering how these strategies are incorporated in their portfolio based on the underlying exposures — see private equity as a part of the overall equity allocation. This is lending itself to a new crop of alternatives, creating a new cycle.
What’s the best way to maximize alternatives for ultra-high-net-worth individuals?
Determining why you are including certain strategies in the portfolio should always be the first step. Incorporating strategies into a portfolio with limited liquidity implies a longer-term time horizon — even if there are mechanics for liquidity — and any strategy should be included with an eye toward increasing the probability of meeting a client’s desired outcome. For longer-term portfolios designed for wealth accumulation and eventual gifting or philanthropic giving, selecting strategies designed to offer capital in exchange for flexibility and latitude in timing of transactions, such as venture capital and private equity, makes sense. Conversely, investing in income-generating assets which also have a capital appreciation opportunity, or strategies that are more tax-advantaged in terms of their distributions, may be appropriate for investors with a desire to supplement current income or limit taxes while still accessing opportunities outside of the public markets. Overall, creating a plan that involves a disciplined, programmatic approach tends to result in a portfolio of alternative strategies that delivers.
What are your clients most concerned about when it comes to alts?
Liquidity is very often the biggest concern for individuals when it comes to allocating to alternatives. While there are often avenues to garner liquidity for clients in the event of an emergency, an emphasis on proper sizing and allocation to avoid needing the assets even in an emergency is a better approach. Guiding clients to understand that the percentage of their overall portfolio allocated to alternatives should be determined only after an evaluation of the assets needed to maintain to meet immediate — and that could even mean two to three years, depending on the spend — liquidity and to continue to grow principal through traditional public market exposure. Only then can the allocation to alternatives be determined, and the tenor of the underlying assets then needs to mirror any additional longer-term needs. Many clients are also concerned about the complexity and opaqueness of certain strategies and/or asset types. But in our experience, those concerns are often much less pronounced than the liquidity issue.
Where do you see the most opportunity?
With higher rates and a banking system which has been through several fundamental shifts over the last 15 years, firms that can be flexible, value-add liquidity providers to small and medium-sized companies have an advantage. In addition, we believe that we are undergoing a transition to a new regime, where private investors will no longer be able to rely only on financial engineering to generate strong returns on invested capital but instead will need to effect operational and strategic improvements at portfolio companies to create comparable results to those achieved in a lower-cost-of-capital environment. More specifically, we see particularly attractive opportunities in areas that are running chronically short of capital and liquidity, such as private debt, private equity secondaries and co-investments.
Looking out on the horizon, where do you see the alts space in five to 10 years?
The line between public and private investments — and thus between cash, equities, fixed income and alternatives — continues to blur. Much of the historical research on valuation, spreads and liquidity are based on and frankly anchored in periods where the public markets were the primary avenue of transparency and price discovery. With the growth of the private markets and the shift in how capital is provided into the market, many of the tenets on which we evaluate opportunity over the next five to 10 years need to include the impact that a flexible approach to investing in asset classes across both public and private will produce. Supplementing equity and fixed-income exposures, both public and private, with noncorrelated, niche assets that still require an information advantage is likely to become increasingly important.