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Private credit managers seek a toehold in financial advisors’ model investment portfolios
by Lisa Fu
One of the oldest rules in investment is being bent to accommodate the relentless advance of private credit.
Asset managers are tweaking the traditional recommendation that a portfolio should consist of 60% equities and 40% bonds. Instead, they are including private debt and other alternative investments in model portfolios they offer to advisers and clients.
The model portfolio, with pre-selected managers and asset class exposures, has become a convenient way for investors to access public asset classes through mutual funds and ETFs in a single package.
Financial advisers already oversee USD 6.9tn of assets in such portfolios for US investors — a figure projected to rise to USD 13.5tn by 2029, according to Broadridge Financial Solutions, an asset and wealth management fintech firm. Unsurprisingly, private credit managers are pushing to get their products included.
Every subsequent model portfolio purchase generates capital flow
Neil Blundell
Head of investments
CAIS
“We are big believers that model portfolios, which are really blueprint portfolios for financial advisers and individual investors, are a material way to deliver alts,” said Greg Leveto, a partner and portfolio manager at Oak Hill Advisors, a subsidiary of T. Rowe Price.
Last month, T. Rowe Price and Goldman Sachs said they would team up to create model portfolios that include various alternative asset strategies, including private debt. As part of the collaboration, Goldman plans to invest up to USD 1bn in T. Rowe Price shares, with the intention of owning up to 3.5% of the Baltimore-based firm.
In a regulatory filing in July, JPMorgan Investment Management said the model portfolios it offers to financial advisers may now invest in private market assets such as real estate, infrastructure, private equity and private credit.
CAIS, an alternative investment products marketplace for independent financial advisers, made a series of alternative investment model portfolios available earlier this year.
For private credit managers, model portfolios promise a steady stream of fee income and a way to sell interval funds and other semi-liquid investments with relative ease.
Being added to a model portfolio gives a manager access to a whole new group of investors.
“[The single private credit product] might represent only a portion of the model, but once included, every subsequent [model portfolio purchase] generates capital flow without significant incremental effort from the GP,” said Neil Blundell, head of investments at CAIS.
Including private credit in model portfolios is a relatively new phenomenon. It has become possible only with the proliferation of semi-liquid investments like interval funds and non-listed BDCs in the past three to five years.
Most private credit managers still rely heavily on sales teams to sell their product to wealthy investors. Even once a product has been approved by an advisers’ platform, the sales force must still convince individual advisers to recommend it to their clients.
Model portfolios free up time for financial advisers to focus on signing up new clients and providing advice on estate planning and taxes rather than hand-picking investment strategies. Not only are the managers and allocations pre-selected, but some models also allow financial advisers to outsource any necessary portfolio rebalancing as the market changes.
However, although model portfolios have a proven track record in publicly traded assets, illiquid assets like private credit present challenges.
A model needs to take account of the investment minimums associated with interval funds, BDCs and other private credit vehicles, Blundell said.
Rebalancing can also be problematic. While many private credit interval funds can be purchased easily, redemption documents must still be filled out even for partial exits.
