The past few decades have seen large disruption in asset management and expanded the opportunity set for individual investors managing their savings. First, e-brokerage firms, such as E-Trade, enabled private individuals to invest directly into publicly listed financial products at minimal costs from the comfort of their own home. This was the individual investors’ first step toward independence from banks and advisors and the cumbersome intermediary process. A more recent phase of this development is the emergence of robo-advisors, which has enabled investors to build diversified portfolios with low minimums and low fees without the need of ongoing advice and trading. As we look ahead, we expect this trend to continue and additional segments of asset management to undergo similar developments, as technology-enabled solutions gain momentum. In this context, alternative asset classes, long solely a privilege of institutional investors, are showing clear signs of similar disruption. Whereas parts of the alternatives space may not yet be mature enough, the highly developed and historically attractive private equity segment is in our opinion going to be the next piece of the puzzle.
Private equity firms invest in mature businesses with the goal of increasing their value and subsequently selling them at a profit. For this purpose, private equity firms raise funds from outside investors, such as pension funds, insurance companies, and educational endowments. Even though private equity firms’ assets under management of circa $3.4 trillion represent only 5% of publicly traded companies’ capitalization, data from McKinsey points to the trend being towards an increasing share of private markets, as the number of US private equity-backed companies has doubled from 2006 to 2017. Since 2006, and as per Cambridge Associates latest available index data, private equity funds have outperformed stocks, as measured by the MSCI All Countries World Index, by an average of 7.9%, whereas top quartile funds have outperformed by an average of 13.8% (excluding vintages after 2015 due to later funds being too early in their investment cycle). However, as the minimum investments into such funds range between $10-15m, individual investors have traditionally been excluded from this market segment.
To this day, incumbents such as fund of funds, private banks, and other intermediaries have been the main point of private equity access for high net worth individuals (HNWIs). However, fees can be high and opaque, minimums significant, and access limited. The higher fees can partially be explained by the way that incumbents still operate in a paper-based environment. A process which can also be the source of additional frustration for investors due to the cumbersome customer experience – the subscription process can frequently take as long as two weeks to complete.
The digitalization of private equity investing allows for reaping the dual benefits of technology: cost efficiency and convenience. It allows individual investors to access private equity funds at minimums that improve their capacity to build truly diversified and customized portfolios, along with lower operating costs leading to more attractive returns. All while maintaining the convenience of an online offering, providing an unrivalled customer experience via end-to-end digital onboarding, reporting, and cash management solutions.
As robo-advisors enabled investors to build diversified portfolios of publicly listed assets, we at Moonfare offer investors the opportunity to extend their portfolios and access one of the most lucrative asset classes. Via the Moonfare platform, individuals can invest in and build portfolios of curated top-tier private equity funds with attractive and transparent terms for as low as €100k, while joining a community of leading decision makers, C-level executives, and entrepreneurs. The company has in record time attracted north of €100m of assets under management and has built a growing like-minded community of more than 3,000 like-minded users.
Whereas Amazon’s revolution of the retail industry and Apple’s redefining of the smartphone market, make the overhaul of asset management seem slow in comparison, it is nevertheless moving in a similar direction with the same inevitable momentum. In recent years, new innovations have not only kept pace with the past but increasingly accelerated, with many new entrants addressing alternatives. Disruption of private markets investing has been late to the party. But it is finally here.
Cambridge Associates, 2019, Private Investment Benchmarks.
McKinsey & Company, 2019, Private Markets Come of Age, McKinsey Global Private Markets Review 2019.