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How to Win in Asset Management … Unless You’re the Middleman

by trusted insight posted 3years ago 434 views

Guest Post by Greg Silberman, CIO Atlanta Capital Group.


“The holy grail of asset management is distribution.”

I have taken too many meetings to believe this is an aberration.

We are seeing disruption in business on an unbelievable scale today.

Almost every business we come into contact with is undergoing some kind of radical shift.

Primarily brought about through technology AND in every instance arbitraging out a middleman.

Done on a global basis, as it is today, there are literally millions of brokered transactions that are simply being ironed out of the system.

Now ask yourself, if technology makes it cheaper and quicker to meet your customer and thousands of potential customers, to whom does that unlocked value accrue?

Clue – not the middleman!

It is ultimately shared between the buyer and (disproportionally) the seller or originator.

Bull Market

It is hard to tell when the animal spirits take over and the fundamentals give way but there may certainly be more to this bull market than simple money printing levitation.

Given the amount of problems we see being solved by technology we think the unlocking of value is completely underestimated by investors - and by extension this bull market may have some legs yet.

In addition, we just don’t perceive the all out mania for technology that usually signals the blow off phase at the end of a bull market … perhaps yet to come?

Valuations do seem stretched - I will hand you that - but since when did a bull market end simply because valuations were too high?

The holy grail of asset management is distribution.

One business we see undergoing an interesting restructuring is asset management - private placements in particular. In our post America Works & Crowd funding we explained how the Jobs Act of 2012 has made it easier for private placement opportunities and investors to find each other.

Typically this role was played by a placement agent --- we see this position evolving into a placement platform instead.

AngelList, I believe is the business model for the future placement platform.

That ecosystem is very well described in a blog post at bootstrap called - The Rise of Angel(List) and how it is rapidly changing the game of angel investing

There are 3 main parties in the new placement model:

  • The founder – who finds many potential backers on a platform

  • A backer – who ‘backs’ the founder with his/her own funds BUT through social proof – endorsements, reviews, $ allocated and track record generates followers who engage in;

  • Syndication – a group of investors who can choose to follow a backer into a deal & the backer earns a carry off of their funds.

Why backers love AngelList?

Figure 1 - The Rise of Angel(List) and how it is rapidly changing the game of angel investing

What we find really interesting is that AngelList sought and received a No Action Letter from the SEC to deploy its disruptive syndication model as a Registered Investment Advisor and NOT a FINRA broker-dealer (the typical avenue of registration for a placement agent).

The last published number we could find was $200m that had been raised by founders on AngelList since 2010. Before we get into the economics, remember that the average ticket size for a syndicated investment is between $25k and $50k.

Enter The Trusted Insight*


While AngelList is causing disruption in the $30B venture space other companies such as The Trusted Insight are attempting to disrupt the $6 Trillion (that’s with a T) Private Equity, Private Real Estate, Hedge and Real Asset universe (aka alternatives).

The average check size here is approximately $10m to $50m.

Here’s how the intended economics would work on this and other platforms.


First bear in mind the traditional placement agent earns a flat fee of approximately 2% on Dollars raised. Once off.

Private Placement Model


In the platform model, the platform helps form the syndicated entity, is the general partner, and provides the platform for the lead to ‘advertise’ the opportunity. The platform receive 5% of the carry (performance fee) for doing this.

The elegance of this fee is that:

  1. It is back end loaded – the fee crystallizes on exit;

  2. no performance = no fee;

  3. alignment of interest between platform GP and the fund;

Syndication Platform Model

Figure 2 - hypothetical example assumes a 7 year exit and 3.5x multiple

The syndicate lead relies on the platform to help with the asset raising and earns 15% of the carry on exit. This means that:

  1. The lead is incentivized to maintain the highest standards of due diligence and care to attract future investors;

  2. The deal is well vetted before others follow in;

  3. The lead puts in his own money aligning interests further;

  4. Leads can carve out an area of expertise and don’t have to be generalists.


Syndication Lead Model

Figure 3 - hypothetical example assumes 7 year exit and 3.5x multiple


The beauty for the investor is that they can:

  1. Piggyback on the deal flow of proven investors;

  2. Be more of a generalist and cover more asset classes reliably;

  3. Do NOT pay a management fee.

  4. Pay NO fees (other than fund admin, audit etc.) if the deal does not perform.


In this model the placement agent has been cut out of an upfront fee of $2m. The investor no longer pays management fees. Almost all fees have become contingent on investment success. Seems like everyone wins except the middleman.

I have seen a few iteration of the above, for instance where a platform introduces a traditional fund – there is an imbedded management fee.

In fact, I am also seeing platforms insist on a small ante into their fund in order to participate in the co-investment platform. Alternatively platforms may charge a subscription fee.

Large family syndicates have been operating in a similar way for ages however this approach is much more transparent which I believe makes it more leverage able to more investors.

The question I still have is who is incentivized to run a syndicate?

RIAs, asset managers and family offices are. I do not see the likes of Pension Plans, Endowments or Foundations adopting this business model immediately.

Those entities still need to evolve to resemble the Canadian Pension model where there is a large amount of co-investment activity occurring.

What do you think of the private placement platform and how do you think it will reshape distribution?

Best
Greg


Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

Advisory Services offered through Atlanta Capital Group.

To invest in platform deals investors generally need to be accredited as defined by the SEC. Nothing in this article should be interpreted as a recommendation to buy any security. Please conduct your own due diligence.

source: Trusted Insight: Disrupting the $6 Trillion Alternative Asset Market

* ACG is an investor in Trusted Insight


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