Private equity platform Moonfare has topped €2bn in assets under management as the asset class, historically reserved for the ultra-wealthy, has become more open to everyday investors, raising new opportunities and risks.
The Berlin-based company on Thursday said the amount of money it manages for clients has doubled in less than a year. The company provides individual investors with access to a portfolio of buyout funds, which traditionally have been limited to backers who could pledge millions of dollars.
Although Moonfare can only sell its services to “sophisticated investors”, as defined by regulators, and has a minimum investment threshold of £50,000 in the UK, its growth is a signal of the appetite for private equity among a wider group of investors looking to diversify their portfolios by adding new elements beyond stocks and bonds.
Do-it-yourself investors in the UK can also gain some exposure to private equity strategies through investment trusts or by buying shares in listed private equity houses such as Blackstone and KKR.
Steffen Pauls, Moonfare founder and chief executive, said adding private equity to portfolios boosted both diversification and returns.
“A professional investor on average allocates 25 per cent of their assets to the asset class. An individual investor on average allocates 3 per cent. We want to change this,” he said. “The problem is that 98 per cent of all people cannot invest, because the entry level for large players is $10mn and above.”
“The typical investor for us is a lawyer, a consultant or a director at an investment bank,” he added. Moonfare also partners with banks and wealth managers who can advise their clients on whether it’s suitable to invest.
Venturing into new asset classes brings new risks for retail investors to consider. One secret to private equity’s reputation for high returns is that money invested with buyout managers is locked up, typically for a term of 10 years.
Moonfare, which is backed by investors including Fidelity International, provides two opportunities each year for customers who need their cash back sooner to sell their stakes in an internal marketplace. The company says most customers who need to exit are able to sell, but this is not guaranteed.
“It is a long-term investment that is by its nature illiquid,” said Pauls. So investors need to think about whether they can afford to pledge their money for up to 10 years.
Another factor for investors to consider is the need to select the right manager. Private equity has a reputation for excellent returns, but not all groups have turned in a stellar performance.
Research from State Street last year showed that the top quartile of global buyouts returned a handsome 20 per cent on an annualised basis over the previous 10 years. But the sector’s bottom quartile has limped along, with returns close to zero, while still taking the industry’s notoriously high fees.
Industry figures have also warned that poor managers may have had an easier time eking out some returns in recent years as ultra-low interest rates and economic growth created favourable conditions.
“Every fool in the industry has made 2x or more in the last 10 years,” said Pauls, who previously worked at private equity heavyweight KKR. “The overflow of money, low interest rates, rising valuations, economic growth — we have all of us been in honeymoon times.”
Moonfare has redoubled its due diligence on the managers it selects for its portfolios, as the industry braces for tougher times ahead. Tighter central bank monetary policy and increasing risk of an economic downturn could expose poor private equity managers.
“Now is the time, the most in the past 10 years, where the selection of the right managers really counts for your future success,” Pauls said.