Why Mercer Advisors Built Fund of Funds to Reach More Clients
Mercer Advisors, a Denver, Colo.-based registered investment advisor with $114 billion in client assets, is two years into an in-house fund of funds option for clients in the “middle space” of about $10 million in assets to invest in alternatives, a top investment executive said Tuesday at the opening of RIA Edge Private Markets in Austin, Texas.
David Krakauer, vice president of portfolio management at Mercer, explained to Wealth Management Editorial Director David Bodamer why the firm developed investment strategies to provide lower-cost access to private markets and credit for clients with comparatively lower levels of assets.
“We’ve got million-dollar clients, and we’ve got billion-dollar clients,” Krakauer said. “We do direct deal investing for top clients. But then there’s also a middle space there, let’s say $10 million. … and for those clients, we really decided that the best thing for those clients was to do something that wasn’t really available in the market, and that was to bring an in-house.”
That solution, Krakauer said, was for Mercer’s team to select general partners and provide diversification in one fund—and one K-1 tax filing—“but doing it without any additional layering fees.”
Mercer started offering the in-house fund of funds about two years ago, with the investments now in their second vintage. Mercer advisors get access to the “menu” of options to consider what would work for their client across private equity, credit or real estate.
“It’s really up to the advisor to decide what’s best for that client,” Krakauer said. “We give our advisors a lot of free rein to look at our whole menu and decide, you know, is this a match for liquidity? Is this a match for sizing? Is this a match for the overall objective? … Some clients really are focused on income or just true diversification.”
Krakauer admitted, in response to an audience question about uptake, that the fund-of-funds offerings were still in the nascent stages of use by Mercer advisors.
“The fund of funds are really for just a select sub-segment of the lower-level QPs (qualified clients),” he said. “When we think about the broader menu, we have a lot of flows going into evergreen. We have a lot of flows going in direct deals, even co-investments. But the fund-to-fund space is still pretty limited, where we just have a couple there for the main groups.”
Krakauer made the comments as asset managers working in private markets continue to seek inroads into the RIA sector to reach more clients. But advisors’ concerns about the complexity of the offerings, liquidity constraints and added costs, at a time when clients are seeking fee reductions, have created stumbling blocks.
According to Schwab’s most recent independent advisor study, under half (45%) of 1,235 RIAs offer clients access to alternative investments.
Krakauer said Mercer’s team has found that simple models are likely to gain more traction, and that they have realized they shouldn’t get “too cute” with the complexity of the investments.
“We had a fund of funds that was working in a lot of private credit, but mixed in with some tax-efficient strategies to help offset the taxes of the yield,” he said. “We found that it’s too complex for the advisors to understand and to go out there and actually explain to clients and to raise money with. … I’m a big believer that just because you go up market, it doesn’t mean it needs to be more complex.”
For smaller firms, Krakauer said there are plenty of solid interval funds and evergreen options for clients, but as with any investment, advisors need to “look under the hood” and ask questions about interest coverage ratios and the quality of underwriting.
“It’s not too different from how you would analyze other areas of the markets,” he said.
