Regulatory and operational constraints present barrier from tapping hundreds of trillions of dollars in wealth assets
Faced with increasing volatility and weakening prospects of returns in the public markets, more and more wealth firms and their clients are looking for ways to tap opportunities in private equity. And while general partners have traditionally found it too onerous to go beyond large-scale institutional investors in offering their strategies to, technology is increasingly picking up the slack.
“The trend in terms of the growth of private equity investment is very, very strong,” says Charles von Moll, managing director of Bite Investments.
As von Moll explains, Bite Investments is a global financial technology company that provides software-as -a-service (SaaS) to alternative asset managers and enhances connectivity to investors. It also operates an asset management business that enables non-institutions to get access to high-quality, alternative investment products.
“The private equity universe is growing at about a 12 to 14% CAGR over the past 30 years, one of the highest growth rates for any financial product,” von Moll says. “A lot of that is coming from the non-institutional space.”
Citing estimates from VCP Apex, which was a company also started by the founders of Bite Investments, von Moll estimates that institutional allocations into alternatives have risen dramatically to the 30%-40% level over the past 10 to 15 years. But over the same time, non-institutional segments – including wealth management firms and family offices – penetration rates remained measly at 2% to 4% globally.
“Today, the wealth management segment has grown into a roughly US$100-trillion market opportunity. But alternative investment managers didn’t have access to that market,” von Moll says. “Equally, that US$100-trillion pool of capital traditionally didn’t have access to the very, very top alternative investment managers.”
The problem for many wealth advisors, von Moll explains, is that accessing private equity for the first time involves a steep learning curve: most PE funds don’t perform much better than the average performance of a well-diversified public equity fund – a net disadvantage when considering the steep 1% to 4% subscription and performance fees PE fund managers typically charge; they require a very different subscription process; and the underlying asset is very complicated.
“It’s really critical that you’re able to get allocations at the top-performing funds, and most of them are filled up with allocations from pure institutions who’ll go in again and again,” he says. “Because of our technology and long relationships with these funds, we’re able to put several hundred investors together into a single US$50-million allocation. It’s not a product that’s possible to access for just anyone.”
From the side of the PE fund, each subscription requires a lot of work in the onboarding process. That includes gathering know-your-client information, following anti-money laundering protocols, and ensuring all documents are certified and accounted for, to name some. The sheer amount of labour involved, von Moll explains, makes accommodating subscriptions of just a few hundred thousand dollars apiece impractical for many GPs.
“For so long, these GPs didn’t bother going to high-net-worth investors because they had very antiquated systems to do all this work,” he says. “They might rely on Excel spreadsheets and generic CRMs, with maybe 20 people and a handful of administrators dedicated to processing documentation. We’re able to white-label our technology, Bite Stream, for these asset managers to use and make their lives a bit easier.”
According to von Moll, the Bite Stream technology allows investors to log onto a manager’s website and certify themselves as appropriate. From there, they can view information about different funds, then sign the subscription documents electronically once they’re satisfied.
Another way the Bite Stream technology helps asset managers is by providing a full compliance framework. It allows only suitable and appropriate investors to pass through and see the funds, and offers different frameworks to be applied across different regions. That means a Europe-based asset manager, for example, can more comfortably attract investors from Asia, Australia, and the U.S.
“Public markets are very volatile, and we’ve seen some huge losses there of late. We have historically not seen that type of volatility in the private markets,” von Moll says. “At the moment, there’s about US$2 trillion of dry powder held by GPs, which they can use to pick up some very attractive assets. That’s why you have often seen PE outperform in the two to three years after a market selloff.”