The private markets are no longer exclusively the domain of large institutional investors. An ecosystem of digital platforms has emerged to provide access for high-net-worth individuals and their intermediaries, such as private banks and wealth managers.
Among these platforms is Moonfare, which was founded in 2016 by CEO Steffen Pauls, formerly KKR‘s head of Germany. It capitalizes on the idea that more people should have access to private equity and venture capital funds.
The company reached the milestone of $1 billion in AUM in 2021 and has since more than doubled that. The company has found favor among many investors, such as Fidelity and Insight Partners, with its Series C extension in February bringing the total for the round above $130 million.
PitchBook sat down with Pauls to discuss how the market has evolved to accommodate more private market participation outside of institutional investors and how the trend will shape the future of the asset class.
PitchBook: Which factors are behind private market investors seeking new sources of capital from individual investors?
Pauls: The foundation for the democratization of private equity was the [global] financial crisis. After it occurred, GPs suddenly started to think about diversification of their LP base. One thing they came across was that there are all these individuals out there who are totally underallocated to private equity. They began asking questions such as: How can we tap into the largest growth capital that’s out there for private equity for diversification and for growth reasons? They wondered how they could access retail investors. And, frankly, no one came out with a clear solution.
When I left KKR in 2015, I was calling my friends and asking them: “I can’t invest in PE alone, but maybe as a community we are stronger than an individual so join me and we can pool all our capital.” As individuals, we can make it to the $10 million threshold [required by KKR at the time], but my lawyers stopped me and said “you can’t just run around, this is a regulated industry.” This is why I decided if you can’t do it alone, you do it as a community—and Moonfare was born.
What are the benefits of retail investors gaining access to private equity?
There is an unprecedented proposition happening in private markets. As the number of IPOs goes down, the opportunity increases, [and it’s] much higher than public markets. The regulators agree that private equity is not only a privilege for large institutions. I believe this is a game changer. And why? Because even true retail investors can invest in private equity with $10,000. It’s just a case of education and time; then more and more people can benefit, getting access to private equity.
How do retail investors deal with the illiquid nature of PE?
We have more than 50,000 people on the Moonfare platform, and over the years to come, I believe it will be in the hundreds of thousands. Theoretically, we have hundreds of thousands of people willing to buy private equity stakes and others are willing to sell, and we have many professionals using the platform.
We have people from the PE industry, family offices, [high-net-worth individuals] and we also have an established institutional backstop through a partnership with Lexington Partners, a secondaries player. They serve as a professional market participant. It’s not a must; they’re not obliged to bid in an auction, but as a digital secondary marketplace functioning last quarter, we processed $85 million of secondary transactions.
What is the age demographic of Moonfare clients?
The average age of UBS and Credit Suisse private wealth clients is 63. That’s fine. But clients need a different approach in the digital world for those using Robinhood, Revolut and are used to getting everything on their smartphones. It’s very interesting. Around 40% of our clients are aged between 26 and 44.
But that’s the beauty of modern technology. We provide tons of education, including talks with PE managers, online. We had [KKR co-founder] Henry Kravis a few weeks ago for a one-hour discussion. So I think these days it’s all about technology.
Established PE firms have launched semi-liquid funds to engage with the retail market. What do you think of them?
For the time being with the semi-liquid sector, we are in a wait-and-see mode. We are very curious to see the products that are about to launch to the market. Our main job is investment managers. We look into the investment process and we decide what we believe is best for our clients. There must be someone in between. We are not taking money from the GPs or taking placement fees. Semi-liquid products also don’t have a guarantee of liquidity.
Investing in semi-liquids and pure private equity funds is a very cumbersome process manually. It takes two weeks before you’re done. With Moonfare the process takes 15 minutes. It’s fully digital and that is what the new generation wants. There is an absolute need for liquidity and semi-liquid funds have some liquidity, but we believe our liquidity and mechanism in our digital marketplace is critical.
How did you get onto GPs’ radars?
It’s about progress. We want to reach scale because the more money you can offer, the more relevant you become for the GPs. Many of them don’t care about $5 million, but if you go there with $100 million you become relevant. They don’t want to work with one provider in France and another in the UK. That’s why we are aiming to provide global solutions.
Related read: How PE is paving the way for private wealth
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