Several asset classes\u00a0have been transformed or at least impacted by the\u00a0crowdsourcing model.\u00a0Early stage investing and real estate are two\u00a0areas that immediately come to mind. But can crowdsourcing impact\u00a0the stodgy world of midcap and largecap private equity? Private Equity has been an excellent asset class over the last few decades, but very few individuals have access to these funds. Even being an accredited investor is not enough for the likes of KKR, Blackstone, or other\u00a0well known private equity funds which may have\u00a0investment minimums as high as $5M. Why? Because\u00a0the cost to acquire a limited partner is very high, the administrative requirements\u00a0of dealing with a limited partner are onerous, and\u00a0private equity firms are often interested in limiting the number of limited partners they have\u00a0to provide information to.<\/p>\n
So what are these private equity firms missing out on? $10 trillion in consumer wealth that could be tapped for capital raising efforts! The solution utilized by private equity funds thus far has been a poor one: receiving capital from\u00a0Fund of Funds. Fund of Funds are partnerships that\u00a0invest capital into private equity funds and hedge funds. They charge their own limited partners\u00a0“2 and 20” (2% of AUM and 20% of returns, or some iteration of that) on top of the\u00a0fees charged by the private equity and hedge fund managers they invest in. The\u00a0Fund of Funds are often willing to take on accredited investors with as low as a $50K investment. They pool money from these various investors and act as a single limited partner to the funds they invest in. They demand\u00a0their fee because they are providing access to an otherwise inaccessible asset class and because they are\u00a0supposedly actively creating a portfolio of “the best managers.”<\/p>\n
Why pay a\u00a0Fund of Funds a significant\u00a0annual fee to place your capital with private equity firms that are easily recognizable as having a strong track record? A better model would provide accredited investors who can’t reach investment thresholds (and eventually retail investors)\u00a0direct access to the funds of their choice. A tilt model would\u00a0aggregate\u00a0many small investors until the necessary threshold (say $5M) was met and then invest in the private equity fund as a single limited partner. Certainty of capital calls would be a major issue with smaller investors, but is one that could be solved with innovative financial structures.<\/p>\n
A platform providing this service could charge an\u00a0initial, one-time placement fee. A strong technology backbone would allow for\u00a0a rapid and efficient documentation process. Combining this with a branded platform that could employ a\u00a0paid customer acquisition strategy at a lower cost than a large private equity firm could.<\/p>\n
Private Equity firms with strong recent track records are in some\u00a0senses not in need of additional venues for\u00a0raising capital. But the pitch to them is as follows:<\/p>\n
I believe that for this type of platform to work, it must target the best private equity firms. Adverse selection is an obvious problem: the firms having trouble raising capital (and the worst performing funds) are most likely to utilize this platform. That notion can immediately be quelled by signing up just one of the top 20 or 30 firms in the industry.<\/p>\n","protected":false},"excerpt":{"rendered":"
private equity and retail investors: disrupting fund of funds<\/p>\n","protected":false},"author":46,"featured_media":0,"comment_status":"open","ping_status":"closed","template":"","categories":[806,803,161,804,805],"class_list":["post-1931","hck-submission","type-hck-submission","status-publish","hentry","category-asset-management","category-fund-of-funds","category-investing","category-private-equity","category-retail-investors"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-digit\/assignment\/leveraging-the-collective-intelligence-and-effort-of-digital-crowds\/","yoast_head":"\n