Fintech platform Moonfare aims to democratize private equity

Fintech platform Moonfare aims to democratize private equity
Fintech platform Moonfare aims to democratize private equity

When it comes to investing, most people either alternate between stocks and bonds with little exposure to private equity and other options.

Moonfare Gmbh aims to change this with its fintech platform which aims to open up a wider avenue for individuals to tap into the asset class.

As Moonfare’s founder and CEO Steffen Pauls sees it, private equity should be more easily accessible to investors as another key part of their portfolio that surpasses equities.

US private equity delivered a three-year return of 25.1%, compared with 18.9% for the S&P 500, as of June 30, 2021, according to earnings data from Cambridge Associates. Over the past decade, US private equity has returned 16.7%, compared to 14.8% for the S&P 500 over the same period.

“We want to democratize the asset class,” Pauls said. “We want to bring it down to the common investor to make the world a better place. It’s unfair that 98% of the population is left out.”

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Moonfare positions itself as a financial technology player that can offer a digital process for customers to access large private equity funds. It’s a departure from the large amounts of paperwork typically required for private equity investments, which were originally designed not for individual investors but for institutional investors such as pension funds and endowments.

These institutional players can typically allocate 25% of their portfolio to options, compared to about 2% exposure from individual investors.

True, private equity investments for Moonfare clients and anyone else who uses private equity through a feeder fund for individual investors are required by US regulators to have a certain level of wealth. Families with more than $1 million in investments and at least $300,000 in household income qualify.

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Although this is a high income level, the US is home to around 19 million accredited investors.

Private equity firms want to leverage more of this individual wealth as a way to diversify their client base.

“The industry has a genuine interest in getting into this retail channel,” Pauls said. “It’s the largest untapped pool of capital.”

This desire from private equity has enabled Moonfare to offer its clients access to some of the stronger private equity funds out there. Previous fund offerings include KKR North America Fund XIII, Permira 8 and Tiger PIP XV.

Also read: Goldman Sachs’ private equity business has been a “black box,” but now it’s opening up

Moonfare addresses a need to provide an easy-to-understand, highly transparent pricing model for investors to put their money into options such as buyouts, infrastructure, private debt, US venture capital and secondary funds.

It offers digital services such as tax reporting and documents in one place. You can be accredited and invest in a private equity fund in as little as 15 minutes. Initial investments typically start at $125,000 with a minimum holding of one year.

After that, Moonfare offers liquidity options for clients to sell their fund shares through secondary fund sales.

With around 200 employees and growing, Moonfare now ranks as the largest direct-to-consumer platform for individuals to invest in private equity funds, with more than 40,000 users in over 30 countries and more launching this year. Moonfare said on July 7 that its assets under management now total two billion euros, or about $2.05 billion.

Moonfare looks to avoid the higher fees that can eat away at returns and push excess profit levels above public market returns. Investors will have to pay the same fees as institutional investors to the underlying funds – often a management fee of 2% and a performance fee of 20% of (transferred) gains.

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On top of that, Moonfare charges an annual fee of 0.35% to 0.85%. Investing through feeders usually also has external costs associated with the operation and administration of the investment, but Moonfare tries to limit these to 0.20%. The company is not a placement agent, so it is not paid by private equity firms to find investors. It generates its revenue through its fees.

Pauls founded Moonfare in 2016 after working for KKR & Co. Inc. KKR,
as CEO and Head of Germany from 2004 to 2015.

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Looking at the current private equity landscape, Pauls said funds that invested heavily in 2021’s high prices and hefty valuations will be more challenged by the current environment.

However, funds with newly raised capital looking to use their money in the current environment have more potential to deliver strong results down the road.

“In a recession, we would see an extended investment period,” Pauls said. “Holding periods will increase in part because the IPO and exit markets are closed, until valuations begin to recover. But, [private equity firms] raising now and distributing over the next two to four years should be well positioned for strong returns without necessarily longer holding periods.”

Moonfare raised $125 million in Series C funding in November 2021 led by Insight Partners with an aim to increase its presence in the US. Earlier in 2022, private equity firm Vitruvian Partners LLP committed $35 million to Moonfare.

Private equity firms have created feeder funds as a way to diversify their investor base. Meanwhile, some of the big fund advisers such as Vanguard have also pushed into alternatives.

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A private equity fund is similar in some ways to a mutual fund or an ETF. Instead of listed companies, however, the funds consist mainly of privately owned companies acquired by the private equity manager.

Private equity firms typically structure the funds to last 10 to 12 years, which is often enough time to buy a company, grow it, and then sell it at a profit. Investors in the fund get an 80% share of the profit from a sale, and the private equity company keeps a 20% carried interest fee for it.

Just as the U.S. stock market once served only the very wealthy in its earlier days and became more accessible over time to more individuals, the same process could take place with private equity, Pauls said.

The industry is working on ways to use blockchain technology to shrink private equity fund investments down to much smaller chunks of $10,000. Tokenized funds such as digital securities exchange ADDX in Singapore are implementing blockchain technology in an offering with Hamilton Lane Inc.’s HLNE,
Lane Global Private Assets Fund, for example.

Also read: ‘They’ve broken barriers’: On Wall Street, the new biggest private equity firms are run by black and Latino billionaires and people of color.

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