CAPITAL WATCH Tapping into a multi trillion-dollar market

Private US individuals can now use no-frill fintech firms like iCapital to access real estate funds and other alternatives. PropertyEU's deputy editor-in-chief Robin Marriott travelled to the epicentre of the private equity universe, New York, to interview one of the players in this nascent industry.

dan vene co founder of icapital

Dan Vene Co Founder of Icapital

The opening up of investment managers to America’s vast reservoir of private wealthy individuals is one of the most striking longer term structural changes being witnessed in alternatives. A proliferation of vehicles are being structured to cater to this retail asset pool estimated as being worth multi trillions of dollars, which The Blackstone Group’s Joan Solotar recently described at a finance conference as ‘as large as the institutional pie’.

With this in mind, PropertyEU travelled to New York, the epicentre of the private equity universe, to interview one of the players in a nascent industry that provides wealthy individuals with direct access to funds traditionally reserved for institutional investors.

On a floor at One Grand Central Place, Manhattan, we met with iCapital Network, a financial technology start-up company that launched in 2013, just before The Carlyle Group became one of the best known groups to widen its customer base by making a buyout fund available to those with a net worth in excess of $1 mln (€0.8 mln) or income over $200,000 a year in each of the two years preceding investment.

Since 2013, other franchises have made strides to create platforms to tap private wealth, sometimes directly for real estate investing. For example, in 2016 The Blackstone Group set up Blackstone Real Estate Income Trust (BREIT) as a non-traded REIT seeking up to $5 bn in aggregate from individuals. PropertyEU understands Brookfield Asset Management and Oaktree Capital are two major alternative firms working on ramping up activity to capture their share too.

Dan Vene, co-founder of iCapital, says his firm is helping to facilitate private wealth into such alternatives funds via a platform the company has built over the last five years. It has so far steered around $5 bn of capital into alternative funds, and Vene expects this to grow.

Three access routes
Prior to such firms, there were traditionally two ways for private wealth to access alternatives funds. The first is to open an account with a broker-dealer or private bank such as UBS, Morgan Stanley or Credit Suisse. The second method is more ‘episodic’. A private person might get into a ‘friends and family’ round with a relative at a private equity firm or perhaps invest in a local project via a private developer, for instance.

But now there is a third way. Firms like iCapital have built platforms offering a suite of fund choices and administrative and reporting support that can be integrated with wire houses, independent advisors and family offices that represent trillions of dollars of capital in the HNW and UHNW sectors. It has already signed the wire houses mentioned.
In an industry which so far has just a handful of players, a private individual can now plug into such a platform via a paperless registration process that takes minutes to complete.
The customer answers various pre-qualification questions and uploads documents from driving licences to W9 forms. After the application is reviewed and approved, the private investor is then provided access to various alternative funds effectively as a dropdown menu.

As you would expect, iCapital has already done the leg work as a regulated firm to select managers and funds. It performs manager selection, regulatory overview, due diligence tasks, and makes accessible relevant fund, company, and market opportunity information to the individual. The private client clicks around the data and then makes a choice to invest a minimum of $100,000 in a fund. The client only has to make the one-time e-registration in order to make multiple fund investments.
The most common method is for the private investor to access iCapital’s platform via a financial adviser at a major broker-dealer/wire house or registered independent adviser. The second most common route is for the private investor to go directly to iCapital’s platform.

The fact that all the investments coming in via iCapital’s portal are channelled into a particular fund do not mean the fund manager ends up with an unmanageable number of individual investors because iCapital represents them all as a single limited partner. The firm is responsible for the necessary regulatory and reporting aspects of the fund to the investors. The firm makes money by charging private investors an ongoing administration management fee.

Trillions to tap
In the US, private investors are segmented into three main categories: Accredited Investors with $1 mln investible net worth; Qualified Clients with $2.1 mln of net investible assets; and Qualified Purchasers with $5 mln or more of investible assets. The only thing excluded in the investable asset calculation is primary residence.

There are estimated to be about 1 million US qualified purchaser households out of the roughly 100 million US households. The number of accredited investors is 10 times that figure, at 10 million. If one considers the volume of target investors fronted by Registered Investment Advisors (RIAs), of which there are more than 15,000 in the US, estimates indicate as much as $3.5 to $4 tln in investable assets is available.

Morgan Stanley alone is said to have a private client base of roughly $2.2 tln, with the likes of UBS having a similar amount. ‘You are looking at another $6-10 tln of high net worth capital between all the wire houses and private banks,’ says Vene.

In order to grow their business, firms such as iCapital employ a quarter of their workforce in distribution and marketing roles to meet with wire houses and also independent investment advisers. They ‘educate’ this community about the funds offered on their platform. iCapital also employs a diligence team of 10 to work on the pipeline of future offerings. Just over 50% of the remaining staff work on the software, technology and operations.

Curated menu
At the moment, iCapital has 20 investible offerings. Although that is a fraction of the funds universe, Vene explains that individual investors or financial advisors would otherwise run the risk of being ‘overwhelmed’. The company’s model is to deliver a ‘curated menu’ of the highest quality offerings based on iCapital’s internal diligence staff of 10 professionals.

‘There is no limit to the number of managers we can put on the platform,’ he says. ‘We have been approached by, and have 300 funds in our forward calendar that at any given time we are reviewing and monitoring for market appetite. We could certainly have several hundred managers live on the platform today. The issue it poses is presenting an adviser or client for whom it maybe be the first or second time for investing in alternatives as an asset class. It becomes a bit overwhelming for them to review all the different offerings.’

Not only are fund managers cottoning on, but so are placement agents representing fund managers that would welcome private investors in their funds. And Vene says there is no reason why European managers cannot tap US private wealth using its channel.

It seems this is part of the e- financial movement of bringing products to the masses, and as such it offers choice and flexibility. But would it create a personal finance bubble if a dangerous amount of private capital gets tied up in long-term products which can of course lose value as well as gain?

Longer term investment
Part of Vene’s response to this draws on the events of the past few weeks when the volatility of US stocks was stark. In a single day, the Dow lost 1,175 points and the S&P 500 suffered its worst session since August 2017 in what was called a ‘correction’. iCapital, points out Vene, is not offering investors exposure to daily priced liquid alternatives, but rather private equity funds with a typical three-to-five year investment period and a total fund term that can range from five to as long as 15 years.

‘In the last week or two you see the volatility in public markets and the desire to pull assets out when that volatility increases. Our view is that tends to be the wrong solution for a long-term investor. Most people don’t use the duration they have in their lifetime to benefit from that illiquidity premium. Forty-year-old individuals are likely have a 30 to 40-year investment horizon and should not be overly concerned with investments with daily liquidity.’

Vene is not suggesting people should have 100% of their capital locked up in longer term alternative funds. Commonly, financial advisers say private investors should have around 20-30% of their investments in alternatives, and emerging wealth should have anywhere from 5-20%. But today, the exposure of private wealth to longer-term alternatives funds is far, far lower than recommended. It is estimated wire houses only have around 3 or 4% allocation to alternatives against a target of between 5 and 30%.

Vene: ‘When one examines the investors represented by the independent financial adviser community, of which there are more than 15,000 in the US alone, you are looking at less than 1% current allocation to alternatives. So, you are seeing a fairly dramatic fall off from target to actual exposure today. The reason is quite simple. It is about access and resources available to do that due diligence. We see that 1% or sub 1% allocation looking more like 3, 5, 7 % over time. You are pulling off a $3.5 tln market place, so there is very significant room for growth for real estate and private equity managers.’