Private equity platform Moonfare surpassed 2 billion euros in assets under management as the asset class, historically reserved for the ultra-rich, became more open to everyday investors, opening up new opportunities and risks.
The Berlin-based company said on Thursday that the amount of money it handles for its clients has doubled in less than a year. The company offers individual investors access to a portfolio of buyout funds, which have traditionally been limited to backers who could pledge millions of dollars.
Although Moonfare can only sell its services to “sophisticated investors”, as defined by regulators, and has a minimum investment threshold of £50,000 in the UK, its growth is a signal of appetite for private equity among a broader group of investors looking to diversify their portfolios by adding new elements beyond stocks and bonds.
Do-it-yourself investors in the UK can also gain exposure to private equity strategies through investment trusts or by buying shares in listed private equity firms such as Blackstone and KKR.
Steffen Pauls, founder and chief executive of Moonfare, said adding private equity to portfolios has boosted both diversification and returns.
“A professional investor allocates on average 25% of his assets to the asset class. An individual investor allocates an average of 3 percent. We want to change that,” he said. “The problem is that 98% of all people can’t invest because the entry level for big players is $10 million and above.”
“The typical investor for us is a lawyer, a consultant or a director of an investment bank,” he added. Moonfare also partners with banks and wealth managers who can advise their clients on whether to invest.
Venturing into new asset classes brings new risks for retail investors to consider. One of the secrets to private equity’s reputation for high yield is that money invested with buyout managers is locked in, usually for 10 years.
Moonfare, which is backed by investors including Fidelity International, offers two opportunities each year for clients who need their money sooner to sell their stakes in an internal market. The company says most customers who need to exit are able to sell, but that’s not guaranteed.
“This is a long-term investment that is inherently illiquid,” Pauls said. Investors should therefore consider whether they can afford to pledge their money for up to 10 years.
Another factor investors need to consider is the need to select the right manager. Private equity has a reputation for delivering excellent returns, but not all groups have achieved outstanding performance.
State Street research last year showed the top quartile of global redemptions returned a handsome 20% on an annualized basis over the past 10 years. But the bottom quartile of the sector limped off, with returns close to zero, while continuing to bear the industry’s notoriously high fees.
Industry figures also warned that bad managers may have had an easier time securing returns in recent years as rock-bottom interest rates and economic growth have created favorable conditions.
“Every fool in the industry has won 2 or more times in the last 10 years,” said Pauls, who previously worked at private equity heavyweight KKR. “Money flooding, low interest rates, rising valuations, economic growth – we’ve all had a honeymoon.”
Moonfare has been doubling down on due diligence on the managers it selects for its portfolios, as the industry braces for tougher times ahead. Tighter central bank monetary policy and the growing risk of an economic slowdown could expose bad private equity managers.
“Now is the time, the most in the past 10 years, where picking the right managers really matters to your future success,” Pauls said.