The retailisation of private market funds has “just started”, according to Steffen Pauls.

Pauls is founder, chairman and CEO of Moonfare, a platform that allows individual investors to access private market funds. Founded in 2016, Moonfare is based in Berlin, with operations in Luxembourg and several other global financial centres. The company feeds placements by higher-end retail investors into alternative funds that otherwise are only accessible to large institutional investors and the very wealthy.

During an interview with Delano, Pauls outlined how Moonfare works and disclosed that the firm will be launching a venture capital product and a co-investment fund in the coming months.

What is Moonfare?

Moonfare “allows for the first time investors with smaller minimum investments to invest directly in some of the globally leading private equity funds,” said Pauls. In fact, Moonfare provides access to a wide range of private market funds. “The term should be more ‘alternatives’, but we use ‘private equity’ because the broader public has a better understanding when it comes to ‘private equity’ than ‘alternatives’,” he stated. The firm aims to “open up the space of private equity for private individuals. We call it democratisation of private markets.”

Who are your investors and what’s the process like for them?

“In terms of who invests, that’s very much subject to regulation,” said Pauls. “Certain requirements” set by national financial regulators have to be met “before an investor can invest into private equity,” he explained. “In a nutshell, what is required is there must be a certain minimum investment, and people have to have a certain wealth and knowledge about the asset class.”

“We are currently addressing the more upper end of wealthy individuals, less so what you would call ‘retail’ because of regulation. We would love to do so, but for good reasons, regulators have a ban on it.”

Pauls said that investors on his platform fall into two segments. “One is what we call the self-directed investor. That’s someone who understands private equity, who knows the asset class.” This includes lawyers, accountants, bankers, management consultants, startup founders and financial industry service providers. “They come to our platform, they get a tonne of information about a specific fund.” While these investors might seek supplemental information from Moonfare’s team, “they make up their minds” themselves about particular investments. “They are not getting advice on our platform.”

The second segment are investors who seek guidance from bankers or wealth managers. “They need explanation about the asset class, how it works. They need explanation that it’s illiquid, the long term investment horizon,” he said. “Several private banks across Europe use our platform in a white label solution. So they get the entire technology, they get the access to all our curated funds, pre-selected from a large universe.”

How many funds are available and how do you select them?

Moonfare puts “a lot of effort into the selection of the funds, we only want to have the best funds out there on our platform,” claimed Pauls.

He said that only 5% of the funds it reviews each year pass its screening process. “We look at 230 funds in a given year and some 20 make it to the platform.” His investment team are all “insiders” who know the sector and the players inside-out. “They run a professional due diligence process, with the 80-page paper, no stone left unturned,” he stated. “We are really relying on long-term track record. We want fund managers that have managed to get over the virus crisis. Think about 9/11, think about the [2008] financial crisis. We really want to understand how they have been investing in the past and what the strategy is for the future. So this is why we only would put funds on the platform that at least have been out in the market for 10, 15, even 20 years or more.”

What other products do you provide?

The company has a “basket of funds” option. “It’s a highly diversified portfolio” across private market classes. Moonfare is also in the process of launching “a venture portfolio product,” said Pauls.

What is the minimum investment?

The minimum investment “differs from jurisdiction to jurisdiction,” Pauls said. The average is €100,000, but in Switzerland it’s 125,000 Swiss francs and in Germany it’s €200,000. In Luxembourg, “our offering starts at €50,000.”

Your investors are upper end retail. Do they really understand how private market funds work? Isn’t it a bit risky for someone who doesn’t know private markets very well?

“You’re totally right,” conceded Pauls. However, he pointed to what he believes is a huge shift in the marketplace. When he joined the heavyweight alternative investment outfit KKR in London in 2004, “private equity was a niche as a class. But this has really changed. I would say in particular over the past five to seven years, dramatically.”

According to Pauls, 25% of global merger and acquisition activity is now “driven by private equity funds.” This has seeped into the public’s consciousness. “People are reading about it, people have developed a better understanding, there’s much more education and transparency out there, which is, by the way, a consequence of the financial crisis.” He said that general partners, which run the funds, “became much more open minded in terms of sharing information, making what they do transparent. They have to, because they became such an instrumental force in the global economy.”

While there is an “increasingly large number” of savvy investors who understand private markets, “there’s a huge need for education. And you’re totally right, the last thing that we want is to ‘lure’ someone, so to say, into the asset class, who doesn’t understand that this is a long-term commitment, who doesn’t understand the risks, because that would kill the democratisation of private markets.”

“We really try to educate our customers, and if you ask me, this phenomenon, what the industry calls ‘private entity goes retail’, has just started,” Pauls said. “We are really doing the utmost we can to educate people. The largest bottleneck for people to discover the beauty of this asset class is education, is understanding. You’re totally right, but there is a large group out there already that understands how private equity works.”

Are private equity firms pitching you on getting their funds included?

“We have a very strong bias automatically because of our selection process to funds that are oversubscribed in the institutional market. It means they get more demand than they can supply. So it’s not really that the funds are begging to get onto our platform. They see us as a strong strategic partner, because we are opening up the pool of capital and the type of customer that they don’t address, which is the smaller, private individual. Look at Carlyle or KKR, they focus on the $100m, $500m, $1bn checks.” Moonfare’s investors are “for them, the long tail”.

Do you accept placement fees?

“We never take money from the funds,” stated Pauls. “I always want to have a totally unbiased and a neutral, objective decision on a given fund,” so Moonfare does not accept placement fees. “The one who pays us is the final investor.”

What do you charge?

Institutional investors typically pay a 2% management fee and 20% performance fee on profits beyond an agreed threshold, called carried interest. Moonfare investors pay the 2 and 20 to the private equity fund and then 0.5%-0.75% on top of the management fee to Moonfare. “So 50bps to 75bps more than the institutional investor, but you only invest €100,000.” There is no fee added to the carry. “We don’t want to eat into the returns too much,” while the business naturally still has to turn a profit.

Are investors locked in for the lifespan of the fund?

“We have a digital secondary market, so you have a path to liquidity.”

And are all your funds eligible for the secondary market?

Investors can sell their limited partner stakes on the secondary market at set intervals. “Currently we have 35,000 people on the platform, so you can be pretty sure that there is a buyer for your stake,” he said. “We are also working, to make really sure that there’s a marketplace, with one of the largest institutional secondary players in the world, which is Lexington Partners. They are participating in 90% of all cases in the secondary market to make sure that we have a professional backstop there.”

Where do you see Moonfare in three to five years?

“This term ‘private markets go retail’ or the ‘democratisation of private markets’, as I said earlier, has just started. If you take the numbers, on average, a professional investor allocates 25% of their portfolio into private equity and private markets. The average individual private investor is currently allocated with 2%. Two. There is a huge gap to catch up with institutional investors.”

Pauls cited a Oliver Wyman report issued last year that forecast $1.5trn would flow from individual investors into private equity over the next five to seven years. Pauls wants to capture this market.

“We will very soon launch our first investment product which is a co-investment fund,” which will invest directly into portfolio companies alongside a fund’s stake.

“One very important step for us” is building out the network of advisors that use Moonfare’s platform, Pauls said. “Most of the private banks have no [alternative fund] offering and they need a private equity offering for their end-clients. So that’s a huge ambition that we have, that we work together with the banks, private banks, wealth managers, multifamily offices. We have already more than 50 that work with us, but I want to make this 500.”