Giving retail investors access to private equity
IN THE last couple of years, a new breed of private equity firms has been quietly securing liquidity from a previously untapped pool of investors. Historically, private assets have been restricted to institutional investors due to the significant capital outlay required to participate in such off-market deals. These new entrants have, however, opted to buck the trend of traditional legacy giants, aiming to give ordinary people access to the sequestered private markets space.
By leveraging technology, fundraising firms such as Moonfare, Cadre and Crowdstreet have created online platforms where clients can easily browse and invest in private equity deals ranging from real estate and debt funds to hedge funds and venture capital.
This ability to digitally aggregate capital has meant that the millions in unit currency typically required to participate in such private investments have now been reduced to mere thousands. The total quantum required to participate in private assets has not changed; it is simply that a high volume of small ticket sizes is equivalent to one large ticket amount.
The increase in affordability has broadened the investor base, leading to the democratisation of the private asset space that has picked up speed in the last 2 years. Billions have already been raised by such private equity fintech firms, on behalf of big names such as SpaceX and market funds such as KKR and Silver Lake.
The use of financial technology has opened doors to the rapid pooling of funds from individual investors. From the automated distribution of investor participation agreements to e-signing, technology has reduced the complexities of layers of administrative paperwork normally associated with these legacy dinosaurs.
Previously, private market opportunities were limited to more sophisticated investors, in a bid by regulators to protect retail clients. However, there has been a shift towards a more inclusive financial regulatory framework, particularly in countries such as the United Kingdom, United States, Switzerland, Singapore and India. These countries have some regulations and compliance guidelines surrounding robo-advisors, digital banks, cryptocurrencies and e-wallets.
From the perspective of an individual investor, the reduced investment sum is appealing, and less contemplation is needed in parting with thousands of dollars per investment deal in each fundraise. This results in much quicker decision-making, allowing the new breed of private equity firms to raise millions in a matter of days. This is in stark contrast to courting an institutional investor or family office with multiple stakeholders, which can take months before a firm commitment is achieved.
Consequently, capital seekers are warming to the idea of working with agile private equity entrants that are capable of fundraising swiftly, without all the fuss and approvals-related complexities that legacy relationship managers put their clients through.
With private equity fintech firms choosing to serve the previously neglected class of lower-quantum retail investors, legacy firms will need to step out of their comfort zones and lift the proverbial barriers to investing – or risk losing a significant volume of earnings.
What has worked so far is an economically-inclusive brand image, low fees and a customer-centric approach in developing the platform’s user interface and experience. We expect to see a massive influx of capital from the previously untapped retail investor source, which will see the scales tipping in favour of asset managers that are open-minded enough to welcome smaller investors.
This accessibility also empowers such investors to take a more proactive role in managing their wealth. With the financial crisis of 2008 as a landmark event in the minds of a new generation of investors, most have developed a somewhat tepid relationship with big institutions and Wall Street household names. Many discerning investors are asking for a more independent assessment of the products offered by large financial institutions. They believe in independent platforms that curate offerings, as these are largely remunerated by investors rather than financial institutions.
Today’s investors are more financially savvy, and know how to craft their personal portfolios and take control of their diversification strategies. This is because they are kept well abreast of geopolitical events and understand how central banks impact policy and changes in portfolio earnings.
For instance, global stocks and bonds have fallen due to rising inflation, interest rates, geopolitical tensions and events such as the Ukraine war and China’s regulatory crackdown, as well as the macroeconomic effects of supply-driven shortages in raw materials and energy.
As such, the traditional strategy of combining equities and bonds in a 60:40 portfolio ratio split is expected to experience muted returns. This has led to the general investor populace hunting for alternative investment avenues in which to make up for the yield shortfall, whilst simultaneously shoring up the resilience of their portfolios.
Private assets, in contrast, have been performing strongly throughout the recent tumultuous times. Adding 10 per cent private equity into an investor’s traditional equities-bond portfolio improves risk-adjusted returns by 50-60 basis points for a given risk level, according to a 2021 Barclays Private Bank study.
Even with access to private equity investments now possible due to technological innovation, we note that there remains a key psychological barrier preventing the common investor from leveraging this class of products: the fear of illiquidity.
Private assets typically require longer lock-up periods for capital, which is unfamiliar to those who are used to the liquidity of the public markets. The inability to quickly trade in and out of positions for cash, instead having one’s funds out of reach, can feel uncomfortable.
Hanging onto such an outmoded mentality, however, means forgoing the additional compensation of holding illiquid assets. The enhanced returns from the ‘liquidity premium’ historically have been about 2 per cent on average. The longer an investment tenure, the more time it has to reap the effects of compound returns. There is also an additional opportunity for an investor’s principal to produce earnings and have those earnings reinvested, providing a powerful manner by which to accumulate wealth.
We encourage modern investors to apply a different lens when thinking about longer term private asset investments, and instead, frame it as ‘patient capital’. The time and capital committed, which will be duly rewarded with higher returns and lower volatility, help provide their portfolios a more comprehensive diversification to tide through uncertainty and steel them in their long-term financial goals.
We are excited by the application of new technological solutions to further increase access to private assets. For instance, blockchain technology may help create a secondary market for liquidity purposes. Ultimately the message is clear: adapting to embrace the retail class of investors will be crucial to any financial institution’s survival, new and old alike. Democratisation of private equity is here to stay, and it will only grow in momentum.
Keith Ong is the co-founder and chief executive officer of property fintech firm RealVantage. Victoria Au is its director of business development.
