Deal fatigue is a common phenomenon for intermediaries as they navigate the venture selection...
The Growing Alternative Investment World and FinTech's New Role
The term "Alternative Investment" has gained a lot of traction over the past 20 years, but alternatives have powered the economy since the end of World War I. As private investments became the source of capital that fueled the technology and innovation revolution, the idea of private equity and venture capital became household words. Yet throughout this time, it has been a world with limited players, even among high net worth individuals and family offices because of the difficulty in gaining access and the challenging process to find, diligence, and execute the investments. But with the advancements of emerging FinTech offerings, alternatives and direct private investments are rapidly becoming the highest asset categories in diversified portfolios of accredited investors and qualified purchasers.In 2018, Institutional Investor reported that the alternative investment industry was expected to grow by 59% by 2023, reaching $14 trillion in assets. According to Preqin in January, "The alternative asset industry has continued to grow, and is now the main stay in the modern investment landscape." They are predicting assets under management (AUM) will have a CAGR of 9.8% between 2020 and 2025.
The growth driver has been increased demand from investors for direct access to private placements. This creates tough challenges for RIAs, Multi-Family Offices, and other Advisors. Unlike public markets, alternatives have limited liquidity and are often a long hold, particularly for early stage investments. Yes the potential offers much higher returns - wouldn't it have been nice if your Advisor had introduced you to AirBnB or Toast in their early days - but the level of risk is much higher too. The demand on advisors to offer more alternatives puts pressure on them to find, identify, determine suitability, and to advise before presenting to their clients to invest.
Technology offers solutions, but also challenges. More and more companies that are seeking capital have access to databases of RIAs, Family Office, and High Net Worth individuals to directly send to them their "next great deal". The constant barrage of investment offerings creates noise that makes it hard to hear when the right opportunity for their accredited and qualified clients comes along. We have seen the explosion of crowd funding through new online platforms, such as Republic and StartEngine, but these don't offer either the issuer or the investor the true value of the Reg D offerings that accredited investors and qualified purchasers are seeking. Without any easy platform to manage the process it is hard to provide clients with access to good private investment opportunities.
Fortunately, as the demand for alternatives accelerates, FinTech solutions, such as Trellis, are offering solutions to help cut through the noise, allowing groups to manage and digitize the entire private investment process to connect issuers with investors. As we have seen in banking and public investing, FinTech can transform industries, giving access to opportunities that were significantly limited in the past. These new solutions provide speed in processing, SaaS managed services, and most important accessibility. The goal of these solutions is to bring diverse, diligence ready deal flow to RIAs, Family Offices, and other intermediaries.
As the demand for alternatives grows, the emergence of FinTech solutions will be critical to help investors find quality deal flow that meets there specific requirements, supports efficient and effective diligence, and the ability to complete the transaction with the retention of records and automation of the company's cap table. The projected growth in alternatives can be met thanks to the integration of technology to help simplify the often complex process that is alternative investing.
The next great step will be finding ways to get better liquidity for alternatives, but that is a topic of discussion for another day.