Over the past decade, we witnessed a groundbreaking era of democratized access to alternative investments. It became possible for anyone (or, almost anyone) to invest in a startup, a fund, or a landmark real estate project.
And, now, we have entered the most exciting wave of democratization of access to alternative investments: democratized access to investing in real things.
The hype is real.
The last wave: The era of traditional alternative assets
FinTech has continually ushered in new waves of access to different types of alternative investments. At long last, technological innovations in public markets have made their way into private markets.
Early FinTech innovation around investment platforms was centralized on the lending space. Peer-to-peer lending platforms like Lending Club, Prosper, Funding Circle, and Mosaic were enabling investors to bypass the middleman and invest directly into loans.
This marketplace investing phenomenon continued into crowdfunding, where donation-based platforms like Kickstarter, GoFundMe, and Indiegogo allowed people to support projects in exchange for receiving a first-edition product, early access to service, or in some cases just the feel-good factor of supporting a passion project.
Other iterations of equity crowdfunding platforms started to crop up in different asset classes: Fundrise, Cadre, and PeerStreet in real estate; iCapital and Artivest in private equity and hedge funds; Yieldstreet in passive income investment opportunities.
Each further evolution extended the definition of “alternative” investment.
Not too long ago, it seemed unthinkable that individual investors could invest in fractions of a loan. Lending Club made that possible.
Not too long ago, it seemed unthinkable that individual investors could put $20 into a fast-growing startup alongside a Sand Hill Road VC. Republic made that possible.
Not too long ago, it seemed unthinkable that individual investors could invest alongside pension funds and endowments into a top-tier private equity fund like Silver Lake. iCapital made that possible.
Not too long ago, it seemed unthinkable that virtually any individual could buy bitcoin due to challenges with figuring out where to buy, store, and custody the cryptoasset. Coinbase made that possible.
What are the next set of companies that are going to change the alternative investment landscape?
The current wave: The era of alt alt assets
We now live in a world where people can invest in everything (well, just about).
If there is any cohort of people who view culture as a financial asset, it’s Millennials and Gen Z.
They have grown up in an era where all of these cultural assets - shoes to artwork to trading cards to music - can be bought and sold on an online marketplace at the click of a button.
You can now go on Rally Rd and buy a fraction of a classic car that you could have only dreamed of owning. That car may have enduring value as an investment too.
Same with art, trading cards, and shoes. You can go on StockX and buy or sell a rare Air Jordan shoe just like you can with a share of Amazon stock.
Why alts, why now?
2020 created the perfect storm for alts to take center stage in investors’ minds as a viable, return-generating asset class. The culmination of a number of trends in private markets has made it much more palatable for investors to put money into private markets, even with illiquidity risks.
Technology Innovation: Online investment platforms have made alts both investable and tradable. Just as we have become accustomed to shopping online with one-click purchases, Robinhood made one-click investing into stocks seem normal. Now, a platform like Republic has made one-click investing into private companies possible.
Trading these assets, rather than simply buy and hold, has also become possible. Many of these alt asset platforms, whether its iCapital, Republic, or Rally Rd, are enabling investors to buy and sell via secondary market trading mechanisms on their platforms.
Favorable Regulatory Environment: Private investments into startups were previously the domain of institutional investors like VCs and ultra-high-net-worth investors. That is no longer the case thanks to a much more favorable regulatory regime for private companies and retail investors.
Crowdfunding regulations have enabled investors - both non-accredited and accredited - to access private markets. Regulation CF of the JOBS Act has enabled private companies to complete securities offerings that allow them to raise up to $1 million from all Americans online. Crowdfunding should see an even bigger boost in 2021 as proposed Reg CF amendments increase the limit to $5 million.
Low Rate Environment: Since the Great Recession, we’ve been mired in a low interest rate environment. With rates again at historic lows, where do investors go in their search for yield? Into hot equity markets, alternative assets, and uncorrelated assets that provide the potential for significantly more juice in returns than more traditional assets.
New Names to Trade: For the most part, other than cloud stocks, Tesla, Peloton, Zoom, and a few other names, the equity markets were relatively boring for individual investors pre-COVID as passive ETF investments became the norm. In response to this void, the market brought forward the timeline for private companies going public via traditional IPOs and direct listings, and more recently, SPACs. Yet another example of investors shifting their focus to higher return (and risk) opportunities than more traditional investments were providing.
Value Capture Shifted to Private Markets: Private companies staying private longer has shifted the value creation event for investors into private markets. As Scott Kupor from a16z noted in in a blog post in 2019, the wealth creation opportunity has shifted from public to private markets. Investors in Microsoft’s IPO would have generated 4,800x on their initial investment, whereas investors in Facebook’s IPO would have generated a 7.6x return.
Ability for Investors to Marry Interests with Investments: Never before have investors been able to marry their interests with their investments in such a direct manner. Now, an investor who is a lifelong Chicago Bulls fan can go on Rally Rd and invest into an offering of all 6 Chicago Bulls NBA Championship Rings. Need proof that there was interest? The offering raised $300k and was sold out in 2 minutes.
Putting Your Money Where the Movement Is - Rise of Influencer Investors: We are seeing a rise in influencers - athletes, creators, artists - with meaningful followership. These influencers are increasingly able to direct their followers to buy, use, or invest in things that they promote, which is now more likely than ever to be something they are also invested in - a company, a trading card, a collectible.
Long gone are the days of a 60/40 portfolio (60% stocks / 40% bonds), particularly for Millennials and Gen Z.
So perhaps, alts will be as palatable an investment to Millennials and Gen Z as stocks and bonds have been to Baby Boomers.
The coming institutionalization of alt alts
I was lucky enough to have a front row seat for the past 8 years building alternative investment platforms at Mosaic and iCapital. One of the most interesting features of this trend has been that platforms which aspired to democratize access ultimately ushered in new forms of institutionalization over time.
Retail is usually at the forefront of these new asset classes. Then comes institutionalization.
If we examine the evolution of these first wave platforms, they started out with individual retail investors before bending towards the arc of institutionalization as more capital flowed onto the platform. Then, as with most good things, a flywheel effect occurred as institutional participation beget more retail trust and demand, and then, growing retail participation drove increased institutional demand.
Lending Club - Started out as a truly peer-to-peer lender. Now a public company, Lending Club has since become an origination platform for many of the largest institutional investors and funds to access consumer credit.
iCapital - Started out with providing access to private equity and hedge funds to individual retail investors. Now, iCapital is a platform for the largest banks and wealth management firms to access these funds on behalf of their clients, pushing over $65 billion in assets through the platform in just 6 years.
Interestingly, the first wave of alternative investment platforms democratized access into assets and investment opportunities that were already the domain of institutional investors. Private equity, venture capital, and consumer lending all had meaningful institutional investor participation prior to democratization of access. The innovations over the past ten years (1) enabled retail investors to access these asset classes and (2) created more efficient and less expensive ways for institutions to access these investments in a tech-enabled fashion.
The new wave of alt alt assets has had very little institutional investor participation to date. This is a big distinction from the prior wave.
So, how will these new asset classes institutionalize when there’s not much historical precedent?
Perhaps we should look at the rise of crypto and bitcoin if we want to see what the arc of institutionalization will look like with assets like trading cards and collectibles.
Even as recent as a few years ago, most institutions, wealth managers, and family offices were reticent to invest into crypto assets directly or into crypto funds. Then came Fidelity launching a Digital Assets business unit that provides custody services for bitcoin. And, more recently, institutions like MassMutual, MicroStrategy, and others have plowed hundreds of millions into bitcoin. By the end of 2020, with BTC at a $550 billion market cap and large institutions allocating hundreds of millions into BTC, crypto feels like it’s finally hit the mainstream.
So, could we expect a similar story to play out with cultural assets as we have seen with bitcoin?
Is institutionalization of alt alt assets on the horizon?
Just think about this. In the US, there is over $10 trillion of investable assets held at the wealth management units of firms like Morgan Stanley and independent platforms like Dynasty. That figure is orders of magnitude higher when you look at the opportunity on a global basis.
The HNW investment community remains structurally underallocated to alternative investments. While the average institutional investor may have over 20% of their portfolio allocated to alternatives, the HNW investor with a wealth manager is likely to have closer to 5% allocated to alternatives. And a client of the average RIA might have closer to 1% allocation.
So there’s plenty of room to run with the allocation to alts with the wealth management community as long as they have the right tools to access and educate both themselves and their clients on alternative assets.
The issue of underallocation for advisors and their clients has previously come down to an issue of access more than anything else. Now, these alternative investment platforms have fundamentally solved this problem for both HNW and non-accredited investors.
If we follow this trend, we will not only see financialization of these assets, but institutionalization of these asset classes.
It may be a few years before we see a Fidelity StockX ETF, but it wouldn’t be at all surprising.
When it happens, we’ll know that not only have these platforms democratized access to yet another asset class, but that they have also paved the way for institutionalization of this asset class so that buying a share of a LeBron James rookie card or a Nike Air Jordan shoe becomes as mainstream as buying a share of Apple or Microsoft on the Nasdaq.
And that’s why alt goes mainstream.
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