The Alternative Investment Revolution: How Wealthy Investors Are Reshaping Private Banking

For the past decade and a half, traditional investments in publicly traded stocks and bonds have delivered impressive returns to investors across the wealth spectrum. However, a significant shift is now underway as affluent individuals increasingly look beyond conventional securities markets toward alternative investment opportunities. This emerging trend is fundamentally transforming how private banks serve their wealthiest clients and reshaping the broader investment landscape.

The Growing Appeal of Alternatives

Several factors are driving this migration toward alternative assets. Some wealthy investors harbor concerns that public equities have become overvalued after years of strong performance. Others worry about the potential for renewed inflation pressures or anticipate heightened market volatility in the years ahead. Regardless of their specific motivations, high-net-worth individuals are increasingly seeking diversification beyond traditional stocks and bonds.

“Historically, private investors have been under-allocated to alternative assets compared to institutional investors, but we’re seeing a strong rise in demand,” explains Mark Sutterlin, who heads alternative investments at Bank of America Private Bank and Merrill Lynch. Sutterlin’s assessment is more than casual observation – it reflects a strategic shift in wealth management. “We think most of our clients would be better off with an alternatives allocation around 25%,” he adds.

This 25% target represents a dramatic departure from current investment patterns among high-net-worth individuals. According to research published by consulting firm Bain & Co in 2023, ultra-high-net-worth investors and family offices controlling more than $30 million in assets have already embraced alternatives, with approximately 22% of their portfolios allocated to these investments. However, the picture changes dramatically further down the wealth scale.

Individuals with $5 million to $30 million in investable assets currently allocate only about 3% to alternative investments on average. The percentage drops even further – to a mere 0.7% – among those with $1 million to $5 million in assets. These figures highlight both the magnitude of the potential shift and the significant gap between current allocation patterns and where private banks believe optimal diversification might lead.

A Massive Opportunity for Alternative Asset Managers

The potential implications of this shift are enormous. Individual investors and family offices collectively control more than half of the $289 trillion in global assets under management. This represents an immense, largely untapped reservoir of capital for alternative asset managers who have traditionally focused on institutional investors like pension funds, endowments, and sovereign wealth funds.

According to forecasts from Preqin, a leading research firm specializing in alternative investments, the total assets under management in alternatives – encompassing private equity, private credit, venture capital, hedge funds, real estate, and infrastructure investments – will grow substantially in the coming years. From $16.8 trillion at the end of 2023, Preqin expects this figure to reach $29.22 trillion by the conclusion of 2029. A significant portion of this projected growth is anticipated to come from increased participation by private banks, family offices, and individual investors.

While all alternative asset categories are expected to experience growth, private equity and private credit have emerged as particularly attractive segments of the market. “There’s been a tremendous amount of interest in private equity and private credit all along the wealth spectrum,” says William Whitt, an analyst with Datos Insights who specializes in wealth management. “I expect the strong demand will likely last a couple more years as long as the economy stays healthy.”

Making Alternatives More Accessible

Recognizing this opportunity, alternative asset managers have begun adapting their investment vehicles to better serve the needs of individual investors. Historically, private market investments featured high minimum investment thresholds, lengthy capital lock-up periods, and limited transparency – characteristics that made them inaccessible or unappealing to all but the wealthiest individuals.

“The preeminent sponsors recognize the opportunity and have become better partners with investors,” notes Sutterlin. Industry giants like Blackstone Group, KKR & Co, and Apollo Global Management have launched investment products with significantly lower minimums, more reasonable fee structures, enhanced transparency, and even limited liquidity provisions. “Investors are getting better access to the best strategies on better terms. Everything is changing in favor of end investors,” he adds.

Some financial institutions are taking more dramatic steps to capitalize on this trend. Deutsche Bank, for example, launched DB Investment Partners just over a year ago specifically to provide institutional and high-net-worth investors with access to private credit investments. These vehicles, which typically feature floating interest rates, have been particularly sought after in recent years. Notably, DB Investment Partners operates as an independent entity, while Deutsche Bank maintains its existing private credit business.

A Global Phenomenon

While North America and Europe lead in alternative investment adoption, Asia has also witnessed growing interest in these asset classes. “We’re seeing much more demand from our clients across the spectrum of alternative assets,” reports Chee Jiun Wen, who heads alternative investments at Bank of Singapore. “It’s not just about reducing risks but generating alpha and accessing opportunities you can’t get in the public markets.”

To meet this demand, Bank of Singapore – formerly ING Asia Private Bank – has strategically recruited professionals with institutional backgrounds and significant experience in alternative markets. The bank provides specialized training to its approximately 500 relationship managers, equipping them with knowledge about various alternative asset classes and strategies for integrating these investments into client portfolios.

“We’ve been able to expand the investment universe for our clients and provide access to more investment solutions and investing strategies,” Chee explains.

The bank has extended similar capabilities to its financial intermediary clients. Last year, it launched a digital platform in partnership with global fintech firm iCapital, giving independent asset managers access to over 1,600 funds from more than 600 firms. Beyond access, the platform provides research resources, due diligence tools, and ongoing reporting capabilities for fund investments.

“We’re a first mover in this space in Asia,” says Chee. “We’re giving IAMs the power to pick and choose the managers and investing strategies that make sense for their clients.”

Challenges for Private Banks

For private banks, successfully guiding wealthy clients through increased alternative asset exposure represents both an opportunity and a significant challenge. While most have experience allocating to alternatives for their ultra-high-net-worth clients, the anticipated scale of this shift among the broader high-net-worth population will test their operational capabilities and expertise.

“There is a huge opportunity in private wealth, but banks need to be prepared for the growth,” cautions Trish Halper, Chief Investment Officer in the family office practice at Northern Trust. Halper’s clients have extensive experience with alternatives, maintaining average allocations between 30% and 50%. “Family offices were early adopters in the alternatives space and high-net-worth investors are now catching up.”

Private market investments require substantially more oversight and administration than publicly traded securities. “The dispersion of returns is much wider in private markets than in public markets, which makes manager selection really important,” Halper explains. “Banks need to devote enough resources for strong due diligence because access to information and data is much less in the private markets.”

The responsibilities extend far beyond initial investment selection. Constructing a robust private asset portfolio requires diversification across sectors, vintage years, and financial sponsors to effectively manage risk. Both the investments themselves and their managers require ongoing monitoring. Additionally, private investments involve operational demands like executing capital calls when funds request additional committed capital and managing distributions when investments mature or generate income.

“There are a lot more operational and administrative tasks involved in private investments,” Halper notes.

Preparing for a Transformed Landscape

The growing appetite for alternative investments represents a fundamental shift in the private banking landscape. Financial institutions across global markets are investing heavily in technology and talent to navigate this transition successfully. Their goal is ensuring that increased alternatives allocations genuinely optimize client portfolios and advance their financial objectives rather than simply following a trend.

“The capital markets have evolved,” concludes Bank of America’s Sutterlin. “For investors who want a truly diversified portfolio, if they’re not invested in private markets in both equities and fixed income, they’re not in a big part of the capital markets now.”

As private banks adapt to this new reality, their ability to provide sophisticated guidance, access, and administrative support for alternative investments will increasingly differentiate industry leaders from followers. For wealthy investors, the expanding accessibility of alternatives offers new diversification opportunities and potential return sources – provided they partner with institutions equipped to navigate these more complex investment categories effectively.

This transformation reflects a broader maturation of global capital markets, where the boundaries between institutional and individual investor access continue to blur, and where comprehensive wealth management increasingly encompasses both public and private market expertise.

Acknowledgment: This article was written with the help of AI, which also assisted in research, drafting, editing, and formatting this current version.