Investors wanting to diversify away from mainstream assets have typically not found it easy to access private assets in a passive structure.
Until recently it is has been difficult for smaller investors to gain access to the return profile or factor exposures of many non-vanilla asset classes. Two good examples are private-equity and venture capital funds.
Large minimum investment sizes and regulatory protections due to smaller investors have meant that PE / VC firms have neither targeted or been targeted by retail savers. Hence investments have been reserved for institutional investors and the very wealthy.
This exclusion may not be a bad outcome as a great deal of existing academic and quantitative research, has indicated that the private equity industry may not provide the diversification benefits promised, and that leveraged exposure to the public markets could in theory provide superior returns at lower cost and with significantly greater liquidity.
However in alternative finance there is always a desire to innovate, and the hunt for a competitive edge is continuous. Resultantly many asset managers are currently developing products that are designed to mimic PE returns but at significantly lower cost. As an example State Street, the US asset manager has created a private-equity risk-and-return profile fund with a basket of public assets.
The investment team first matches the sector weights of a typical private equity portfolio with what they deem to be equivalent public companies, and some clients then add leverage (typically between 20 per cent to 40 per cent) to both increase expected returns and more accurately represent the higher risk within Private Equity products. Use of this product synthetically replicates the risk and returns of PE investments but at a fraction of the cost and early returns have been encouraging.
Even more interestingly: Venture capital instruments have also been considered hard if not impossible to replicate until recently, and as a result smaller investors have been under-exposed to this asset class.
However continued financial innovation is now leading to products that would have been unimaginable even a few years ago. A passive venture capital fund now exists and is open to UK investors (with generous tax breaks to UK taxpayers.)It was created by Syndicate Room which is a leading fintech’ and crowdfunding platform based in Cambridge, UK.
The management team at Syndicate Room have developed a passive fund that contains a diverse set of venture capital style investments. (Although it may not track VC indices particularly well.) Known as Fund Twenty8 the fund invests alongside Business Angels, Venture Capitalists and the ‘Crowd’.
The investment managers of the fund use the Syndicate Room crowdfunding platform to source equity investments in start-ups and SMEs investing automatically alongside the crowd and professional investors with pre-ordained amounts committed to each pitch according to a matching algorithm.
Whilst funds invested remain small at sub £10m (as of Jan 2018) the proof of concept indicates that more passive instruments are likely to be developed in this area.
It also shows that there may be further expansion of the passive methodology. We hope to see similar funds enter other asset classes in the near future.
Daniel Tammas-Hastings is CEO of FCA Authorised robo-advisor RiskSave.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.