By Giuseppe Pastore, Clémence Rossetti, and Francesco Galasso
Introduction
In 2016, Dr. Steffen Pauls founded Moonfare, a leading digital investment platform for democratising access to private equity. With assets under management exceeding €3bn, Moonfare offers curated investment opportunities and a secondary market for liquidity.
Dr. Pauls runs the company as Chairman and Co-CEO. He holds a B.A. with high distinction from the University of Mannheim and ESSEC Business School, and a PhD from the University of Trier. He has worked as a research assistant at Harvard University, where he wrote his master’s thesis. Dr. Pauls is a serial entrepreneur with a strong background in the private equity industry. Before becoming an entrepreneur, he served as a Managing Director of Private Equity at KKR and was responsible for the firm’s coverage of the German market.
Could you give us a global overview of Moonfare and its mission?
Private equity has traditionally been an asset class inaccessible to most retail investors. Institutional investors allocate, on average, 25% of their assets to PE. For private individuals, this percentage reduces to 2-5% depending on the source. Thus, there is a huge gap in terms of access and participation of private individuals in this particular asset class.
We aim to democratise access to private equity by taking away four major barriers: The first concerns the minimum investment required, which, for institutional-grade products, is typically $10m. Depending on the product and the jurisdiction, we have reduced the minimum investment to $50k, and in some cases even to $10k, facilitating private investments. Second, it is nearly impossible for a private individual to screen every fund available on the market, and even more importantly, to run due diligence on them. Moonfare acts as an outsourced complementary digital investment office. We have an investment team of 20 seasoned investment executives, former PE directors, and industry insiders, who screen 400 investment opportunities annually. Less than 5% survive, so to say, our due diligence process. We are not a marketplace or supermarket where you can access any fund. Moonfare is a digital investment manager, meaning we focus on curating and selecting the best market opportunities. The third point is the lack of liquidity. Private equity is an illiquid asset class, with investments typically having a maturity period of approximately ten years. In response to this challenge, we launched a digital secondary market where people can trade in and out of their positions whenever they need liquidity.
Last, if you invest in private equity, so to say, offline, you will notice it is a very cumbersome process. You must fill out subscription documents, eligibility tests, AML, KYC, etc. We have digitised and automated the entire investing process, meaning you can invest and fill out the required documentation in 15 minutes on our website.
How do you explain Moonfare’s success? Specifically, how does Moonfare face the challenge of attracting and retaining investors?
Investing in private equity makes perfect sense from a portfolio management perspective. Fortunately, more and more people started understanding this. When I founded the company in 2016, democratising private equity was not as relevant as it is today. It has become one of the top three strategic items of any large GP or PE firm. The entire ecosystem seeks a solution here, and this helped us with our customer acquisition. We are close to reaching 5,000 investors, with over 60,000 people registered on our platform. We are active in 23 countries globally, including regions such as Asia, the US and the Middle East. Very similarly to the stock market, people are building portfolios with us. De facto, 88% of our customers invest in a second fund within a year after their first investment. Regularly investing in our platform, they have the possibility to diversify their portfolios across strategies, managers, regions and vintages.
What was the rationale behind entering Asia before the US? Did you believe there was more opportunity in Asia to democratise private equity?
This was a bold move, to be honest. When Moonfare went operationally live in 2018, we initially prioritised expanding our services in Europe and then expanded globally. Asia was one of the first markets we targeted for two reasons: First, Asia has a high degree of so-called self-directed investors, who autonomously make investment decisions. Their younger, digitally native generation especially, is not banking traditionally anymore. They go self-directed, using the likes fof Revolut to do their banking business. The other reason is that Asia has skipped the entire “desktop phase”. They went mobile immediately, so they are technically highly affine. You might now ask, why is the US different? The US is very different from Asia and Europe. 92% of all US private investors eligible for private equity are either banking with the wirehouses or they have a financial advisor. And this is not the segment we are targeting here at Moonfare.
How does the fund selection process work?
We apply an institutional-grade five-step process like the one adopted by professional fund selectors such as Hamilton Lane and Cambridge Associates. The process starts with a screening. First, we look at managers with a proven track record over a long time period and exclude managers who led less than three funds in the market. We also go on an individual basis when it comes to the track record of the senior partners. Specifically, we want to understand, in detail, how the funds have created value during downturn phases. However, the “secret sauce” of our investment due diligence is having a team composed of industry insiders who used to work in PE, and former senior partners from the most important funds sitting on our Investment Committee. Their industry knowledge enables our due diligence process to identify the best products available for our audience.
What exactly do you think are the reasons that, until recently, institutional investors mainly held this asset class?
Institutional investors have previously understood the role of PE in enhancing the risk-return profile. This is because they have been more exposed to this asset class. One of the major differences between retail investors and professional investors is that institutional investors allocate their assets top-down. So, they start with a strategy and then build their portfolios. The typical private individual acts the other way around, and this explains such a huge gap, apart from a lack of education and access.
Could you please elaborate on how Moonfare drives its mission to educate retail investors on investing in private markets?
The reason why private equity is still a relatively nascent asset class for private individuals is that they simply do not know or know too little about it. Since education is key, we have an education team that writes on how to invest in PE or secondaries. Webinars and workshops are also conducted. In particular, we have a specific format – the deal talk – where I interview some of the most renowned deal makers in the world such as Henry Kravis, founder of KKR. Moonfare is more than a digital platform since every client has a physical contact point with a wealth management expert. Our investors are offered guidance, explanations, and education on why we believe a particular fund is worth investing in. Additionally, our wealth expert investors, who offer their assistance to our clients, are a valuable source of knowledge and insight for our business.
How would you describe the current situation regarding the democratisation of the private equity market?
If I compare it with a 90-minute movie, we are probably at minute two – so this is a very early phenomenon. Back when I founded Moonfare in 2016, nobody was talking about it; however, today it has become a mainstream topic. To understand how big the market opportunity is let us apply simple math. If you assume that private individuals allocate maybe 10-15% to PE overtime instead of the initial 2-5%, the amount that would flow into this asset class for Europe only would be as high as $1.5tn. That is a 1,500-billion-dollar market opportunity. Today, this number stands somewhere between 3-5%, leaving room for the industry to grow. So, what is happening today? Well, the entire ecosystem is jumping on this trend – GPs are developing more tailored products for what they call the retail segment or for private individuals. The latter has been made possible thanks to the ELTIFs regime allowing individuals to invest as little as 5-10k into these products. There is a huge wave of so-called semi-liquid or evergreen products in the market which we also provide to our clients. Unlike typical institutional products, they are open forever which means that you can buy in and out, creating a certain liquidity. So, there is more and more development happening on the product design side – especially on the liquidity component – alongside an increasing number of banks and wealth management firms integrating PE into their portfolios.
And what would you say is still missing to complete the democratisation of this asset class?
We always talk about education, but it is not the only bottleneck for private investors. Of course, they must understand that PE is a must-have asset class, but you also need the advisors in between to be educated enough to explain private equity. Education is not just about the end client, but about the entire distribution system. Today, the entire incentive system for relationship managers must be tailored. Certain technology is also needed. You also need critical size since placing 5 million in a given fund with your customer base does not make sense. It must be 20, 30, 40 million, and many banks, as I said earlier, are subscale. The right products are needed which is why the ELTIF product came into play and the semi-liquid, evergreen structures I talked about. We have just entered the stage where the ecosystem is changing. It will still take years before the penetration in PE reaches similar numbers to those of the public markets. If we make the analogy, the private equity market is like the stock markets in the early 1900s when the stock price was too high for typical people to afford it. However, I believe that it will not take as much time for private markets to evolve as the stock market did.
What was the rationale reasoning behind your partnership with Fidelity and what did they bring to the table?
Well, younger generations are going more direct which increases the number of private individuals who are self-directive. Having said that, there’s still a substantial amount of people who need physical advice from their advisor on asset allocation. Our partnership with Fidelity targets this customer group. We are actively working with many banks using our technology, curation, product offering, and educational material to distribute it as a one-by-one product to end clients. Fidelity is a great partner and shareholder since they help us approach this group of clients by distributing our products to them for example.
Now focusing on the challenges that Moonfare can face, how do you address the liquidity issue?
In 2020, we launched a secondary market in response to growing fears of private individuals regarding the liquidity of this asset class. An auction is held twice a year. After a certain holding period, you can go to the Moonfare platform to realise secondary liquidity. All you have to do is put your stake on the platform and formulate your price expectations. Your AP stake is then priced and added to the platform. More than 60,000 individuals can hand in bids and what we do is connect matching offers and demands.
What lessons have you learned as an entrepreneur?
Well, there are two important lessons. The first one is all about the team you are building – gathering the right people with the right attitudes and who share the same vision. They have to be willing to take risks and innovate together as a team. The second one revolves around the culture you are building which is what glues everything together. At Moonfare, we tend to say that this isn’t your but our collective success. We win together. We lose together. This culture of openness, of being able to go the extra mile, because you believe in the purpose of what we are doing, is extremely important. And then you know, two or three other things. If you decide to become an entrepreneur, be aware that the volatility of your life goes up: one day you think you’re conquering the world, and the next day you think you are going bankrupt. You have to be able to adopt the right mental attitude to cope with both ups and downs. Lastly, you have to believe that the sky is not the limit. Come up with something that has a real, differentiated value proposition, and then stick to it regardless of the ups and downs you may face: you have to be endurant! Being an entrepreneur is not a one-way route, but one determined by ups and downs.
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