A KKR Alum’s Startup Gives Wealthy Investors Direct Online Access To PE Funds On The Cheap

Private equity wants to win over retail investors. Which means that these days, there are more ways than ever for individuals to snag a slice of the buyout business.

The industry’s very biggest firms are publicly traded, including, as of two weeks ago, TPG. You can buy private equity products from Merrill Lynch and Vanguard. You can invest in private equity ETFs. You can buy stock in Petershill Partners and Blue Owl Capital, which own minority stakes in a range of private equity firms and thus function as a sort of index for the industry.  

But for most individuals, getting in on the ground floor of a major private equity fund is close to impossible. A former KKR managing director named Steffen Pauls is trying to make it a little easier.

Pauls is the founder and CEO of Moonfare, a German startup that allows accredited investors to invest six-figure sums directly in specific funds from some of the biggest names in private equity and venture capital. The company launched its platform in the U.S. this week, permitting investors with either $200,000 in annual income or a net worth north of $1 million to shop among individual fund offerings from The Carlyle Group, Tiger Global, EQT, Andreessen Horowitz, Vista Equity Partners and many more. The minimum investment is $125,000, a much smaller sum than would otherwise be required to get in on such funds.

“In the past, private equity has been an asset class exclusive to institutional investors and very, very rich families,” Pauls said. “What Moonfare does is it changes the access.”

Moonfare plans to soon add impact and credit funds to its main roster of private equity, venture capital and growth vehicles. It also operates a secondary marketplace where users can liquidate stakes in the middle of a fund’s lifetime. The company employs a 15-person investment team that combs through a couple hundred options each year to determine which funds Moonbase should offer, with about 10% making the cut.

Investors are eager to get their funds onto the platform, Pauls says, because they believe it could be the start of a much bigger business involving wealthy individuals in the not-too-distant future.

“That’s the key point why we are getting access to these amazing funds, is that the private equity industry is going retail,” Pauls said. “For them, it is really untapping the largest pool of capital that is out there.”

Other companies, such as Titanbay and iCapital Network, operate similar services that are aiding the industry’s attempts to tap into that retail pool. Moonfare stands out by catering solely to individuals and not banks, advisers or institutional investors, too.

Should retail investors even want to put their money into private equity? Private equity products from the likes of Merrill Lynch have drawn criticism in the past, due in part to substantial fees. And there’s growing debate among researchers about whether the industry’s performance is strong enough to make those fees worth it. In a recent report, J.P Morgan Asset & Wealth Management noted that the median buyout fund only outperformed the S&P 500 by between 1% and 5% over the past several years, down from a peak of nearly 15% around the turn of the century.

Fees are still a factor for Moonfare, but the company tries to take a lighter hand. Investors pay the usual management fee to a firm in which they’re investing, typically around 2%. They also pay an additional management fee to Moonfare of between 0.35% and 0.85%, plus a potential one-time fee of between 0% and 1% upon the initial investment in a new fund. In both cases, the specific rates depend on the specific fund.

And Pauls hopes that Moonfare’s fund selection process means that its offerings will perform better than the median—although investing in any one single fund can certainly be a risky endeavor. He sees investing in private equity and venture capital as a diversification play, a way for wealthy amateur investors to bring their own portfolios more in line with the professionals.

“If you just have a portfolio of bonds and stocks, you’re missing something,” Pauls said.

The U.S. has taken recent steps to open up private equity even further to the broader public. In 2020, the Labor Department issued new guidance allowing private equity to be included in 401 (k) plans for the first time. Last September, an SEC panel recommended that the agency consider possible regulatory changes that would provide “wider access” to private equity for retail investors.

Pauls believes the changes are good, and not just because they could be good for his business. The private equity industry experienced its best year ever last year, with deal activity surging and investor profits soaring. He doesn’t think access to that kind of explosive growth should be restricted.

“I find it absolutely unfair,” Pauls said. “We have unprecedented value creation in the private markets, you’re seeing it day in, day out. And 99% of the population is left out.”

Moonfare claims more than 2,200 users that have combined to invest some $1.5 billion on its platform. And it has full pockets, having raised a $125 million round of funding in November led by Insight Partners—which, as it so happens, is another one of the firms whose funds can be found on the Moonfare platform.