A Berlin startup is hoping to make investing in private equity funds from the likes of KKR or Carlyle accessible to a broader – and less wealthy – spectrum of investor. Until now, getting into one of the funds usually required a seven-figure entrance fee, limiting the funds to the über-wealthy or institutions such as pension funds, asset managers and insurers.
“We are addressing experienced private investors. The minimum investment in Germany is €200,000 (€228,00). In addition to private individuals, we also have family offices and private banks," says Alexander Argyros, founder and CEO of Moonfare.
Private equity is considered a risky but lucrative investment. Globally operating funds buy all or parts of companies and restructure them, generally within three to five years, before selling them on or listing them. The funds extract value by pulling out cash and replacing it with a serviceable debt load, by expanding a company’s product portfolio and footprint, or by selling off less profitable units to streamline a company. Sometimes, the funds roll several acquisitions into a single company to create their return.
Finding the right way in
Private equity shops have been helped by favorable financing terms as central banks lowered interest rates. Using bank loans helps the buyout specialists leverage the capital they use in acquisitions, boosting returns. In the year to date, private equity funds have arranged 5,400 deals worldwide, worth $511 billion dollars – an increase of 38 percent.
Currently, the only way for private investors to tap the private equity market is through funds of funds, or a handful of listed private equity companies, such as Blackstone or Deutsche Beteiligungs AG. Moonfare says it provides direct access and already has around 200 investors. Investors use a web interface to sign up and select investments.
The private equity fund EQT VIII, which manages a total of $10.8 billion, received $20 million via Moonfare, while the $18.5 billion Carlyle Partners VII received $35 million dollars. "By the end of the year, we will manage approximately $100 million. By the end of 2019, we’re expecting 2,000 customers and approximately €350 million," says Mr. Argyros, who previously worked for KKR and JP Morgan Securities.
Warburg Pincus will soon join the Moonfar stable and Mr. Argyros says an additional 18 are courting the internet startup, whose board boasts former ProSiebenSat.1 CEO Thomas Ebeling and Heinrich von Liechtenstein, a professor at the IESE Business School.
Prizing open the market
"Business models like Moonfare are a first step towards opening up the retail market. The internet acts as the lever to reach many more clients," says Peter Schwanitz, an independent private equity consultant. Such virtual platforms are a relatively new trend in Germany but the business model is already established, and very successful, in the US, which also has a favorable regulatory environment. In the US, iCapital Network and Artivest each manage around $5 billion dollars and count Blackrock and financier Peter Thiel among investors.
"Due to the rather high minimum threshold for investing, only a relatively manageable circle of wealthy persons and families are potential customers [in Germany]," says Mr. Schwanitz.
In exchange for giving them access to private equity funds, investors pay Moonfare a 0.75 percent fee on each investment as well as a one-time fee of 1 percent of their portfolio at Moonfare.
In the past, private equity funds have seen annual returns as high as 25 percent, though the amount of money currently flowing into the sector may lower future gains.
Because of a glut of cash, critics for years have also been warning that private equity houses have overpaid just to get money invested, which could have a devastating whiplash effect if markets crater. Investing in private equity also requires patience – returns aren’t usually seen until after at least three years of an investment and sometimes require a decade.
"Private equity remains a profitable, but also very long-term, investment which does not change with a virtual business model. You should only invest money you can spare," says Mr. Schwanitz.
Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Andrew Bulkeley adapted this article into English for Handelsblatt Global. To contact the author: [email protected]