Fintech platform Moonfare aims to democratize private equity

The way Moonfare founder and CEO Steffen Pauls sees it, private equity should be more easily available to investors as another key part of their portfolio that outperforms stocks.

U.S. private equity delivered a three-year return of 25.1% compared to 18.9% for the S&P 500, as of June 30, 2021, according to performance data from Cambridge Associates. For the past decade, U.S. private equity delivered a 16.7% return, compared to 14.8% by the S&P 500 over the same period.

“We want to democratize the asset class,” said Pauls. “We want to bring it down to the ordinary 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 tech player able to offer a digital process for clients to gain access to major private equity funds. It’s a departure from the heavy amounts of paperwork required typically 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 may typically allocate 25% of their portfolio to alternatives, compared to roughly 2% exposure by individual investors.

To be sure, private equity investing for Moonfare clients and anyone else tapping into private equity though a feeder fund for individual investors are required by U.S. regulators to have a certain level of wealth. Families with more than $1 million in investments and a at least $300,000 in income per household qualify.

While this is a lofty income level, the U.S. houses about 19 million accredited investors.

Private equity firms would like to tap more of this individual wealth as a way to diversify their client base.

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

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

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Moonfare is aimed at a need to offer an easy to understand, highly transparent pricing model for investors to put their money into alternatives such as buyouts, infrastructure, private debt, U.S. 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 hold of one year.

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

With about 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 being launched this year. Moonfare said July 7 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 squeeze the outperformance levels over public market returns. Investors will have to pay the same fees as institutional investors to the underlying funds — often a 2% management fee and a 20% performance fee (carry) over gains.

On top of that, Moonfare charges an annual fee of 0.35% to 0.85%. Investing through feeders typically also have external costs associated with running and administering the investment but Moonfare tries to limit those to 0.20%. The company is not a placement agent, so it does not get 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,
+1.91%
as managing director and head of Germany from 2004 to 2015.

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

However, funds with freshly raised capital looking to deploy their money in the current environment have more potential to turn in strong performances down the road.

“In a recession, we’ll see a prolonged investment period,” Pauls said. “Holding periods will go up partly because IPO and exit markets are closed, until valuations start picking up again. However, [private equity firms] who raise now and deploy in the next two to four years should be well positioned for strong returns without necessarily higher holding periods.”

Moonfare drew in $125 million in Series C funding in November, 2021 led by Insight Partners with an objective of growing its U.S. presence. Earlier in 2022, private equity firm Vitruvian Partners LLP committed $35 million to Moonfare.

Private equity firms have set up feeder funds as a way to diversify their investor base. Meanwhile, some of the major fund advisers such as Vanguard have been pushing into alternatives as well.

A private equity fund resembles a mutual fund or an ETF in some ways. Instead of publicly-traded companies, however, the funds are made up mostly of privately held companies acquired by the private equity manager.

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

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

The industry is working on ways to use blockchain technology to reduce private equity funds investments down to much smaller chunks of $10,000. Tokenized funds such as the digital securities exchange ADDX in Singapore are deploying blockchain technology in an offering with Hamilton Lane Inc.’s
HLNE,
+1.79%
Lane Global Private Assets Fund, for example.

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