By Ed Rowley, April 2024
A major theme over the last couple of decades has been the rise of the “platform economy.”
Platforms use technology and the internet to connect buyers and sellers and facilitate transactions. Think Amazon with retail, Uber with transportation, and Airbnb with lodging. Platforms seek to “disrupt” and replace traditional business models.
In the alternative investment sector, a number of firms are applying the platform concept to connect investors to private equity, venture capital, private credit and hedge funds.
In our lists and summaries we cover more than 20 alternative investment platforms, which you can view here. Below I provide an overview of alternative investment platforms and how they work.
To understand alternative investment platforms, it’s necessary to first look at what they are trying to solve.
The process by which investors and fund managers find each other and transact is often resource intensive and difficult. Hurdles I see include identification, evaluation, subscribing and monitoring. Each is discussed below.
There are thousands of alternative investment managers with different characteristics. Funds differ by strategy, vehicle type, geography, size, performance, liquidity, fees, length of track record, etc.
Likewise there are thousands of investors ranging from retail to sovereign wealth, and each allocator has specific preferences and needs.
The process by which an investor finds a fund that “fits” and vice versa is challenging for both parties.
For managers, finding investors who have an interest in their specific funds and strategies can be a grueling and expensive process. It involves constant outreach, meetings, travel, conference attendance, marketing and thought leadership.
For investors, they are faced with a barrage of inquiries from managers and spend significant time sifting through funds to determine which ones are relevant to their existing or future needs.
Investors, and in particular institutional investors, have multiple stages of evaluation and due diligence prior to investing. The initial screening identifies a shortlist of funds that meet a current need. Then there is a more intense evaluation process to select the finalist(s), followed by in-depth due diligence prior to allocation.
Collectively, the evaluation process involves numerous meetings and information requests. Further, evaluations are duplicated across the industry as each investor runs their own process for each fund investment.
Each fund will have its own offering memorandum and subscription agreement, which need to be carefully read by the investor and sometimes by legal professionals. Negotiation may be required around fees, transparency, capacity or other terms.
On an ongoing basis, the investor needs to track the multitude of terms in its various fund agreements. This is particularly true regarding liquidity terms, so that the investor knows what capital is available to withdraw, and likewise what capital may be called going forward.
Once the allocation is made, the investor must monitor the manager for material changes in its business, monitor the fund’s performance and holdings, and integrate this information into the investor's overall analysis of its portfolio.
Managers often report information in their own format, requiring the allocator to collect and integrate various types of information. The monitoring process is also time intensive for managers, who spend time putting together reports and communications and responding to ad hoc investor inquiries.
Investment platforms seek to provide a more efficient approach to one or more of the four hurdles described above. Platforms differ in what hurdles they tackle and how they attempt to solve them.
Some platforms provide an online marketplace where managers list their funds. Investors can search for funds with specific characteristics.
In the simplest version, marketplace platforms involve managers posting fund descriptions and materials. More complex marketplaces collect and standardize fund performance, risk and portfolio data to facilitate granular searches and comparisons and enable investors to build model portfolios.
Platforms with marketplaces sometimes allow allocators to post their needs or mandates anonymously for managers to respond to. They may also facilitate communication and online meetings through “virtual cap intro.”
Some marketplaces seek to add as many funds as possible. Others curate or invite managers to join the platform in an attempt to offer only quality funds.
While some platforms don't get involved in the subscription process, others attempt to streamline it. The platform digitizes the process, simplifying it and improving the flow of information between all relevant parties.
Some platforms take it a step further and set up feeder funds to aggregate investor capital and invest in the alternative funds on the platform. Since the platform creates and manages the feeders, the platform can create a standardized subscription process and accept lower minimums.
Multi-manager feeders simplify the process further, as the investor only needs to go through one subscription process to access multiple funds.
Several platforms provide some level of evaluation and due diligence. This can range from basic operational checks, through to the platform only offering managers it selects through an investment process, similar to a multi-manager or OCIO.
Platforms that conduct meaningful due diligence also monitor the funds they list. This creates efficiencies for both managers and investors, since due diligence is centralized with a single party.
Broadly, the alternative investment platforms I’ve seen tend to target one of three groups: individual investors, registered investment advisors (RIAs), or institutional investors.
Individual investor platforms use feeder funds to offer access to alternatives at lower minimums. They also perform due diligence on managers and offer a curated list of funds.
The vast majority of individual investors are not equipped to conduct due diligence on private funds and meet their investment minimums. Platforms try to bridge that gap.
Platforms that serve RIAs tend to fall into two categories. One category is similar to individual investor platforms, where the platform offers a curated menu of funds via feeder funds. This provides simplified access for the advisor's clients and lower investment minimums.
Other RIA-focused platforms build a marketplace that offers a broad menu of funds, but with streamlined access via digitized subscriptions.
Platforms catering to RIAs will often provide the option to create white labeled multi-manager feeder funds that enable the RIA to build and offer customized products to their clients.
Platforms catering to institutional investors tend to focus on fund identification, trying to improve the process by which investors search for and find relevant funds.
Institutional investors such as pension funds, insurance companies, endowments and foundations, and family offices typically want access to the largest investment universe. They can meet investment minimums and conduct in-depth due diligence and monitoring directly with the manager.
At this point, the largest alternative investment platforms seem to be in the retail and RIA space. It's logical that platforms would grow fastest in this area, since individual investors and RIAs face significant hurdles in finding and investing in alternatives. By addressing these hurdles, platforms make alternatives available to more of these investors.
For institutional investors, I currently see platforms as augmenting rather than replacing their existing methods and tools. However, platforms may take a larger role over time as technology enables and drives efficiencies in the allocation process.
Some of the world’s most valuable companies have a platform or marketplace business model. Therefore founders and venture capital investors are continuing to direct time and capital trying to apply the platform model to as many industries as possible.
Alternative investing is a prime target for platforms, given the industry’s size and fragmentation, and the inefficiencies in the allocation process. Venture capital investors are backing some of these alternative investment platforms, in a few cases investing hundreds of millions of dollars to drive their growth.
Platforms can disrupt industries in a couple of ways. First, they displace existing methods. Second, they make products or services accessible to larger groups of buyers.
With alternative investment platforms, I am currently seeing more of the latter (accessibility) rather than the former (displacement). The largest platforms are facilitating new growth in alternatives in the retail and wealth management sectors.
At this point I am not yet seeing much displacement. Platform assets, even among the largest firms, are a fraction of overall industry assets. Further, funds on platforms must still pursue significant traditional sales and marketing efforts to build their investor base.
Whether or not platforms will significantly disrupt the alternatives industry is yet to be seen. It’s an interesting and evolving space, shaped by innovation and technology, and worth watching. I'll continue to update the alternative investment platform lists with new entrants as I find them.
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