Fintech on Friday: Using online platforms to unlock alternative investments

Disappointing returns from traditional asset classes mean some investors are looking to move beyond equity and fixed income and into alternative asset classes such as hedge funds, private equity or real estate.

But access has not always been easy for the private individual, with the prime parts of the alternative universe long the preserve of institutional investors. Now however,  thanks to advances in technology, a number of start-ups are using the digital arena to bring these asset classes to a wider audience.

One such firm is New York-based iCapital Network, which launched in October 2014, and provides an online alternative investment platform to HNW individuals and their advisers.

“High net worth investors have really lacked access to institutional quality alternative investments,” says CEO Lawrence Calcano. “Hedge funds and private equity have mostly been the preserve of institutions. The entire infrastructure, the way they are described and marketed, everything just reinforces the institutional nature of it. You have to be very sophisticated to understand the strategies and you have to have a very deep pocket to access them.”

But the reality is the returns in these asset classes make them very interesting to high net worth individuals, he explains.

The iCapital platform offers access to alternative asset classes at lower minimums than typically required by fund managers. Mr Calcano gives the example of an individual worth $5m or $10m who could never have invested in private equity in the past because the minimums were too high. The platform would allow that investor to take a $1m sum and spread it across 10 different funds, thereby creating a diversified portfolio.

Registration is done online and typically takes a few minutes, though there is a cooling off period, usually 30 days, before any investment can be made. Investment minimums generally start at $100,000, but may vary depending on the underlying investment.

It by enabling access to a wide number of funds that the technology comes into its own, says Mr Calcano. “If you are dealing with just one institution, technology is nice, but it isn’t essential. But if you are dealing with a large number of investors, technology becomes essential. You need a technology platform to operate in this space.”

This is not just about allowing access to the asset classes though, claims Mr Calcano, rather it is about breaking down all of the barriers that have been preventing HNWIs from being able to fully utilise alternatives. This starts at the educational level, he says, by helping investors understand alternative universe – which asset classes create yield, which do not, which are shorter in duration, which are longer, and so on.

“And beyond that we need to provide deep analysis and due diligence reports on given funds. An institution might have a number of people dedicated to analysing funds, HNWIs just don’t have that. So we have to provide it.”

Most contact is with advisers, rather than HNWIs themselves. “Their job is to advise their underlying clients. We are providing them with a robust menu. We educate them and they in turn try to work out which funds are appropriate for which of their investors.”

iCapital currently services more than $2bn in subscriptions from approximately 3,000 individual investors across more than 40 alternative investment funds. The client base is global, though the international side is more skewed towards hedge funds than private equity, reports Mr Calcano. 

The firm has ambitious plans for the future, with new products in the pipeline, along with direct deals, whereby clients could invest alongside a private equity manager, or directly into a property or specific deal. The recently-announced strategic partnership with BlackRock in which the asset manager will lead iCapital’s current funding round and provide a “springboard” to scale the platform’s current growth, should go a long way towards making those plans a reality.

Sufficient volume?

iCapital’s desire to “democratise” alternative investments is a challenge currently being taken up by a number of online start-ups – see Crowdfunding comes to the property sector – although they are developing on an approach that first started in the noughties, says Sebastian Dovey, managing partner at wealth management think-tank Scorpio Partnership.

Although the issue many of these online platforms are trying to solve – namely the inefficiency between buyers and sellers in alternative assets – is a real one, the problem they face is flow and the volume of activity on their sites. Although HNWIs are certainly interested in investing in alternatives, the appetite might not be as high as some think.

“You have to take the enthusiasm with a modicum of balanced thinking,” he warns. “The intent is there, but not necessarily the will to actually do stuff.

Another challenge is the type of access the platforms are able to provide. With hedge funds one of the big issues is around illiquidity, says Mr Dovey. Some online platforms were set up to provide a secondary market, allowing investors to come out of funds that they might have been locked into otherwise, but it can be hard to find an efficient way to do that. Private equity also has issues around secondary market valuations, although the real estate market is slightly different as there are real assets underneath, he explains.