The Future Of Alternative Investments And Crowdfunding

Feb 6 2015 | 12:27pm ET

By Marcus New
Founder and CEO, InvestX

With any fast growing movement there’s a so-called tipping point. Malcolm Gladwell dedicated an entire book to the concept, which went on to become a New York Times bestseller and social phenomenon. The tipping point has been described a number of different ways, but in general, it’s the moment when an idea, trend, business or movement surpasses a threshold and spreads to the masses.

With the documented success of websites like Kickstarter and Indiegogo, and the recent record-setting IPO of LendingClub, it’s safe to say that crowdfunding has surpassed the tipping point. But what comes next for the crowdfunding movement? While the first movers in the space will continue to attract assets, a new phase of crowdfunding sites has emerged that allows investors to receive equity stakes, also known as equity crowdfunding. With the passage of Title II of the JOBS Act, companies and platforms are now able to generally solicit and offer access for the first time to alternative investments such as hedge funds, private equity and real estate.

Unlike the first generation of reward-based platforms, equity crowdfunding platforms are gaining traction as a gateway to viable investment opportunities. Whereas anyone could donate money to a man looking to make potato salad through Kickstarter, investors can now invest in companies that create medicine to treat cardiovascular disease brought on by that potato salad!

These new equity crowdfunding platforms are providing a gateway to alternative investments that have historically been difficult to source and almost impossible to access. Until now, investors needed a million dollar check and an existing relationship or personal connection to an investment manager in order to invest directly in anything other than a startup.

But how big is the current market opportunity for equity crowdfunding? Currently, only accredited investors have access to these alternative investments but those assets have been approximated to total $12.7 trillion, as opposed to retail investors, whose assets top nearly $17.3 trillion. With an overall market of $30 trillion in investable assets, it’s clear that these new platforms could absorb just a fraction of those assets and still thrive in the market.

As investors are forced to search for higher yielding and less volatile investments outside of traditional public markets, many will turn to alternatives to generate greater returns, similar to what pension funds, endowments and the ultra-wealthy have been doing for decades. For years, financial advisors have been recommending clients place between 10-15% in alternatives. Now, accredited investors will be able to invest and diversify their portfolios like professional money managers. While no one is claiming that investors will get the exact same results, the opportunity and choice will be available for the first time for all accredited investors to determine their own asset allocation to alternatives.

Many well-established private companies and attractive funds are being launched on these alternatives platforms, which are benefiting both the end investor and the issuers seeking non-traditional sources of funding. Let’s take a look at a few different subsets of the alternative investments being offered.

● Real Estate – While Real Estate Investment Trusts (REITs) have been around for decades, investors have not been able to directly invest with small amounts. One of the leaders in this space is a new platform called Prodigy Network, which allows accredited investors to review offerings on specific properties at minimums as low as $10,000. Prodigy Network has led six international and U.S.-based projects, raising more than $300 million from 6,200 investors around the world and is currently developing projects with a projected value of more than $850 million.

●  Hedge Funds – The hedge fund industry has been one of the most secretive and difficult to access. Many financial experts have commented that it’s ripe for an investing “disruption.” With the passage of the JOBS Act, hedge funds can now advertise to investors, but few have taken the opportunity. The recent launch of an equity crowdfunding platform called Sliced Investing offers an online platform for investors featuring lower fees, greater transparency and minimum investments as low as $20,000. The company sets up its own funds of hedge funds and utilizes its technology to charge a fee that is lower than most other funds of hedge funds (between 0.50% and 1% annually). The hedge funds are relatively new funds, considered to be emerging managers with track records between 3 to 4 years.

● Private Equity – Similar to the hedge fund industry, private equity has long been an alternative investment class used by large institutions; to give their portfolios access to a traditionally higher returning asset than the public markets. The challenge for investors has been the requirement to invest over $1 million to become an LP in a private equity fund.  With the recent launch of InvestX, that is beginning to change. InvestX is the first equity crowdfunding platform to offer accredited retail investors access to private equity deals in established companies. The deals are sourced and thoroughly vetted by a select group of partnering private equity firms, at minimums starting at $2500 allowing investors to diversify and create a balanced portfolio.  Each InvestX member invests alongside private equity firms and receives the exact same terms in the deal as these private equity firms.

While these new platforms are still in their infancy, I believe over the next 2 to 3 years, the quality of investment opportunities will improve dramatically as more investors become comfortable with crowdfunding for alternative investments, and as funds and companies witness their benefits for raising money efficiently. With enhanced due diligence processes and increased transparency, investors will be in the driver’s seat when it comes to allocating their portfolio to previously hard-to-access asset classes.

So when will the tipping point occur for alternative investment equity crowdfunding sites? The most likely answer is when the SEC finalizes its rulemaking process on Title III of the JOBS Act. This would allow for all retail investors to gain access to these types of investments, rather than only accredited investors. We agree the SEC should be cautious in order to ensure investors are protected from bad actors; however, the power of crowdfunding to support new companies has already been established. As we await the final rules, alternative equity crowdfunding sites must continue to educate the masses to their offerings, in order to better prepare individual investors to make intelligent investment decisions that could significantly enhance their portfolio diversification and returns.

Marcus New is the founder and CEO of InvestX. He also co-founded the Equity Crowdfunding Association of Canada (ECFA), with a mandate to support, educate and develop the equity crowdfunding industry.


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