Monark Monthly, April Edition

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These days, it seems like everyone in retail is talking about alternative investments, and everyone in the alts space is talking about retail distribution. On Robinhood’s recent earnings call, the second question asked was, “When will users be able to invest in private companies such as SpaceX?” Vlad’s response? “This is actually one of our top policy priorities. We believe that it's actually quite crazy that customers can't invest in private companies, given that private companies are staying private longer. The days of Microsoft going public at a multi-hundred million market cap, or Apple at relatively low market caps, and you being able to take advantage of a lot of the appreciation in public markets, they are fewer and far between. Now you have companies like OpenAI and SpaceX still private and in valuations of hundreds of billions. So those gains are accruing to a smaller and smaller group of insiders…” 

The convergence between private markets and retail investors is a multi-trillion-dollar market opportunity. In the April edition of the Monark Monthly, we explore how retail access to private markets (alts) has evolved over the past decade, where we think it is headed, and how firms on both the asset management and retail distribution sides of the market can position to win. 

Historically, retail investors have accessed private markets in a few ways, none of which have proven to be truly scalable for the industry. (1) Direct relationships with the issuer. (2) Through direct-to-consumer alternative investing platforms. (3) Through their financial advisor. Despite their challenges, each of these three points of access have contributed to billions of dollars of retail capital invested in private markets over the past decade. Firms that have seen the most success are b2b platforms like iCapital and CAIS, that are bridging the gap between private markets and the $10T managed wealth channel (RIAs and Wirehouses). But even with these existing points of access, retail allocation to private markets has remained dramatically low. Individual investors on average still have less than 5% portfolio allocation to private markets, with many retail portfolios lacking any exposure to alternatives at all.

While institutional investors have historically allocated about 25% or more of their portfolio to alternative investments, retail and high-net-worth individuals are driving the next frontier of market growth for private markets. Asset managers and market participants are responding by developing products specifically tailored to individual investors, leveraging technology to enhance accessibility and reduce traditional barriers to entry. According to Bain, retail investors represent the fastest growing distribution channel for alternative investments, expected to grow at a 12% CAGR between 2022-2032. Amongst the retail segments, while managed wealth is a $10T opportunity, the over $27 Trillion of wealth held by mass-affluent and affluent investors, who tend to be younger, more self-directed and comfortable investing through technology platforms, represent a massive market segment that alternative asset managers are keen to find ways to tap into. The opportunity in retail distribution is too large to ignore. 

This month three headlines point to the convergence between private markets and retail distribution. (1) Schwab announced the launch of a new alts platform for HNW investors. (2) Blackstone, Wellington and Vanguard announced a strategic partnership to structure funds combining public and private markets. (3) KKR partnered with Capital Group to launch two new interval funds. This month's stories also highlighted the four core pillars that are defining success for firms at the intersection of private markets and retail distribution: Brand, Trust, Simplicity and Scale. What we are seeing in the market today is a changing dynamic around retail access at two fundamental levels. The platform level and the asset management level.

At the platform level, an increasing number of retail brokerage platforms, which have historically provided access to public markets, are entering the private markets in force. Schwab announced this month the launch of its Schwab Alternative Investments Select platform for retail clients with over $5M of assets at Schwab. SoFi continued to expand access to private markets with the launch of an SPV providing exposure to Anthropic (the AI company behind Claude), and ViewTrade announced a strategic partnership with Monark, to expand access to private markets for ViewTrade’s global client base. Across retail brokerages, providing access to pre-IPO companies continues to dominate the conversation, and we expect the pre-IPO market to be the wedge product for many retail brokerages expanding into private markets. 

Pre-IPO companies tap into all four of the core pillars for firms connecting retail accredited investors with private markets: Brand recognition, Trust, Simplicity and Scale. Companies like SpaceX are widely known entities throughout the world. Elon Musk has built a track record of achieving massive accomplishments and communicating them effectively, which builds trust with the retail masses. In many cases, the products created by companies in the pre-IPO asset class speak for themselves, OpenAI with ChatGPT, Anthropic with Claude, Bytedance with TikTok and so on…  Access to pre-IPO investing can still be complex for investors, but platforms that enable a click-to-invest experience, fee transparency and simplify the investment process using product structures like SPVs, are emerging as leaders in the market. While pre-IPO companies are still private, as an alternative asset class they closely resemble the public companies that retail investors are familiar with trading. With over $30B in pre-IPO secondary transactions a year, the market has grown to a sufficient scale that access to high quality investment opportunities is increasingly possible for the masses. 

At the asset management level, two stories this month highlighted the convergence between private and public markets. Blackstone, Wellington and Vanguard announced a strategic partnership combining public and private investments, and KKR announced the launch of two interval funds with Capital Group that will invest in both public and private investment opportunities. Some of the key features of KKRs new interval funds are that the funds plan to allocate 60% to public fixed income and 40% to private credit. Offering investors a $1000 minimum and up to 10% redemptions offered quarterly at NAV. These innovative product structures help simplify and streamline access to alternative assets like private credit and do so at lower minimums and with more potential liquidity.

Strategic partnerships between traditional and alternative asset managers can be an effective way to leverage scale and brand. Many traditional asset managers have spent decades building strong brands with retail investors, Blackrock, Vanguard, Fidelity and more have become household names. For alternative asset managers, partnering with those brand name managers can help elevate their own brands and lead to a greater scale of distribution. For traditional asset managers, the fee opportunity in the interval fund market is significantly higher than in mutual funds and ETFs, driving incentive to collaborate with managers in the alts market. Interval funds and tender funds, while becoming increasingly dominant within the RIA channels, have yet to effectively reach the self-directed retail investor where they are today. So how can firms on both the asset management and distribution sides of the market position to win in retail? 

Firms that are successful at the intersection of retail and private markets will be ones that most effectively leverage brand, trust, simplicity and scale. Brand and trust go hand in hand and drive much of the growth amongst retail investors. Retail brokerages have been doing this effectively for decades, with examples like SoFi Stadium, home of the Rams and Chargers in LA, Moomoo’s sponsorship of the Mets, and Webull’s partnership with the Brooklyn Nets. SoFi is not a football team, Moomoo is not a baseball team and Webull is definitely not a basketball team, but all three firms understand the importance of leveraging brand equity at scale, by partnering with brands that consumers know and love. Trust and brand matter at both the platform and asset management level, and the collaboration between traditional and alternative asset managers is a great way to build trust with the retail masses.

Scale matters to both sides of the market as well, as scale often begets brand. Big marketing budgets require the scale to support a war chest big enough to make long term investments in brand deals that build trust. As a result, we expect the largest alternative asset managers, firms like Blackstone, Apollo, StepStone, KKR, etc… to be the early winners in the retail distribution market. Last, but certainly not least, firms offering retail investors access to private markets need to simplify the process. Private markets are complex, nuanced and difficult for even professional investors to navigate. For retail distribution of alts to succeed at scale, firms will need to simplify their messaging, focus on marketing their core value proposition, and deliver a seamless, “click-to-invest” experience. Private asset classes like pre-IPO inherently check those four boxes, but for other areas of private markets to become as appealing to retail investors and the intermediaries that serve them, they will need to find scalable solution to simply communicate and build trust with the retail masses, building their brand and appeal with distributors in the process.