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How You Can Leverage Personal Market Funding

Individual investors – often referred to as "private investors" – have more power in the public markets than ever before.

A flood of innovations in the last few decades (low-price index funds, free trading, gamified apps for mobile investing, etc.) has given millions of new investors a firm foothold in a world that was previously often massively dominated by massive institutions, moving the market in the process.

There is only one problem: on the stock exchange, institutional investor portfolios did not have the greatest advantage over individual investor portfolios.

It is in the world of private market wealth (think private equity, venture capital, commercial real estate, etc.) where pension funds, foundations, and sovereign wealth funds continue to sow billions of dollars annually while individual investors stand on the sidelines.

<img data-attachment-id = "18622" data-permalink = "https://blog.mint.com/investing/how-to-take-advantage-of-private-market-investing/attachment/fundrise-mint- Blog-Average-Allocation-to-Alternatives / "data-orig-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Average-Allocation-to- Alternatives.png "data-orig-size =" 263,310 "data-comment-opens =" ​​1 "data-image-meta =" {"aperture": "0", "credit": "", "camera" : "", "caption": "", "created_timestamp": "0", "copyright": "", "focal_length": "0", "iso": "0", "shutter_speed": "0", "title": "", "Orientation": "0"} "data-image-title =" Fundrise | Mint Blog | Average allocation to alternatives "data-image-description ="

Fundrise | Mint Blog | Average assignment to alternatives

"data-medium-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Average-Allocation-to-Alternatives.png?w=255 "data- large-file = "https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Average-Allocation-to-Alternatives.png?w=263" load = "lazy" class = "wp-image-18622 size-large" src = "https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Average-Allocation-to-Alternatives.png w = 263 "alt =" Fundrise | Mint Blog | Average Mapping to Alternatives "width =" 263 "height =" 310 "/> Source: Willis Towers Watson Global Pension Assets Study 2016; 2016 National Association of College and University Business Officers; Money Management Institute," Distribution of Alternative Investments across Wirehouses. " The allocations shown are for US pensions and US university foundations.

However, a solution to this problem appears to be imminent. Companies like Fundrise, specifically aimed at opening up private markets to individual investors, are growing rapidly and their clients are starting to build institutional portfolios.

Why institutional investors love the private market

The love affair between institutional investors and the private market has become more and more intense over the years. According to McKinsey & Company:

Private Market Assets (AUM) under management grew by $ 4 trillion over the past decade, up 170%, reaching an all-time high of $ 6.5 trillion in late 2019. The global public market AUM only grew by around 100% in the same period.
In the private market, US $ 103 billion was invested in the United States alone in 2019, up 24% from 2018.

The attraction to the private market is also relatively easy to explain: there has long been a belief that private assets outperform public assets over the long term. Or, as BlackRock (the world's largest wealth manager) explains, "Investors' need for returns, income and diversification has brought private wealth to its current importance."

<img data-attachment-id = "18623" data-permalink = "https://blog.mint.com/investing/how-to-take-advantage-of-private-market-investing/attachment/fundrise-mint- blog-us-private-equity-index-versus-sp-500 / "data-orig-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog- US-Private-Equity-Index-Versus-SP-500.png "Data-Orig-Size =" 512,332 "Data-Comments-Open =" 1 "Data-Image-Meta =" {"Apertur": "0", "credit": "", "camera": "", "caption": "", "created_timestamp": "0", "copyright": "", "focal_length": "0", "iso": "0 "," shutter_speed ":" 0 "," title ":" "," Orientation ":" 0 "}" data-image-title = "Fundrise | Mint Blog | US private equity index versus S&P 500 "-Data image- description ="

Fundrise | Mint Blog | US Private Equity Index versus S&P 500

"data-medium-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-US-Private-Equity-Index-Versus-SP-500.png? w = 300 "data-large-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-US-Private-Equity-Index-Versus-SP-500 .png? w = 512 "load =" lazy "class =" size-large wp-image-18623 "src =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint -Blog- US-Private-Equity-Index-Versus-SP-500.png? W = 512 "old =" Fundrise | Mint Blog | US Private Equity Index versus S&P 500 "width =" 512 "height =" 332 "srcset =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-US -Private -Equity-Index-Versus-SP-500.png 512w, https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-US-Private-Equity-Index- Versus- SP-500.png? Resize = 492,319 492w "sizes =" (maximum width: 512px) 100vw, 512px "/> Source: Cambridge Associates US Private Equity Index versus S&P 500

Private market goods are not traded, which means that they are often less volatile. They are less transparent and more difficult to evaluate correctly, which can lead to price inefficiencies and a higher potential for market returns. They also uniquely benefit patient investors with a time horizon of several decades who are willing to sacrifice public market liquidity for potentially better long-term returns.

The McKinsey Global Institute (MGI) estimates that US bonds will only return 0-2% over the next 15 years (after staying closer to 5-6% in the last 30 years). The same study showed that U.S. and European stocks (i.e. stocks) are projected to be between 4% and 6.5% over the next 15 years. Given this level of potentially sharply lower public market returns, it is no wonder that the money continues to flow into private markets.

However, “return, income and diversification” are generally attractive investment characteristics. Individual investors can also be patient investors with a time horizon of several decades. Why have retail investor portfolios fallen so far?

Explain the gap between individual and institutional portfolios

The inequality in portfolio allocation between institutions and individuals can be explained by a number of factors, including outdated regulations, misaligned incentives and inaccessible minimum requirements.

Until 2012, there were strict asset restrictions that prevented even relatively wealthy, "accredited" investors from investing in most private assets.
The minimum investment in private equity funds is typically high – often around $ 25 million, although some are as low as $ 250,000.
Private asset managers traditionally charge exorbitant fees, with sales commissions, service fees, management fees, and performance fees being part of the norm.

Most critical, however, is the loophole as the world of private wealth management is specifically optimized for institutional investors, not individuals. Up to this point they have "followed" the trillion dollar AUM money. This led to the current state of affairs in which private investors were implicitly or explicitly denied the opportunity to order the same range of investment options as their institutional counterparts.

This has also made the private asset management industry so ripe for disruption.

The rise of the private investor

Sooner or later, the democratizing effect of the Internet seems to find its way into every industry. Sure enough, the technology-driven transformation of public markets is beginning to bleed into private markets as well.

Fundrise, a DC-based real estate investment platform, is one of the leading new companies leading the revolution. In 2012, Fundrise was the first US company to successfully “crowdfund” a private commercial real estate project with only individual investors. Today Fundrise uses its technology-driven platform to offer investors direct and inexpensive access to a diversified portfolio of institutional real estate investments.

<img data-attachment-id = "18624" data-permalink = "https://blog.mint.com/investing/how-to-take-advantage-of-private-market-investing/attachment/fundrise-mint- blog-diversified-Portfolio / "data-orig-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Diversified-Portfolio.png "data-orig- size = "624,308" data-comment-opens = "1" data-image-meta = "{" aperture ":" 0 "," credit ":" "," camera ":" "," caption ":" " , "created_timestamp": "0", "copyright": "", "focal_length": "0", "iso": "0", "shutter_speed": "0", "title": "", "Orientation" : "0"} "data-image-title =" Fundrise | Mint Blog | Diversified Portfolio "data-image-description ="

Fundrise | Mint Blog | Diversified portfolio

"data-medium-file =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Diversified-Portfolio.png?w=300 "data-large-file = "https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Diversified-Portfolio.png?w=624" load = "lazy" class = "size-large wp- image-18624 "src =" https://blog.mint.com/wp-content/uploads/2020/10/Fundrise-Mint-Blog-Diversified-Portfolio.png?w=624 "alt =" Fundrise | Mint Blog | Diversified Portfolio "width =" 624 "height =" 308 "/> Source: Starwood Real Estate Income Investor Fact Sheet (2018), Barrons" Blackstone REIT Facing Price Pressure Amid Real Estate Freeze "(2020)

Fundrise now manages more than $ 1 billion for more than 150,000 individual investors. Fundrise has also traded more than $ 4.9 billion in real estate and has achieved an average annual platform return of 8.7-12.4% since 2014.

It is noteworthy that hundreds of thousands of retail investors, after decades on the fringes, are investing in the same type of assets that were once reserved for sovereign wealth funds – with no minimum asset restrictions, at low cost and at the touch of a button on their mobile device. And this can only be the beginning.

Regulation has continued to prevent retail investors from investing in private market goods through their 401 (k) annuity accounts (which together hold nearly $ 6 trillion in AUM). However, the U.S. government has recently begun investigating a rule change that would allow retail pension funds to expand in private markets.

Earlier this year, Dalia Blass, director of investment management at the SEC, stated that "high street investors (look inside") because defined contribution plans (like 401ks) do not provide access to private investments like private equity, hedge funds and real estate. "

Meanwhile, in June, the Department of Labor issued guidelines allowing retirement plan sponsors to allocate mutual funds that invest in private equity. This still prevents 401 (k) vehicles from making direct investments in private equity funds, but nonetheless the first domino has fallen.

And so the rise of the private investor continues.

* Past performance is no guarantee of future results. Past returns, expected returns, or projections of probability may not reflect actual future performance. All securities involve risk and can result in partial or total loss. Although the data we use is viewed as reliable by third parties, we cannot guarantee the accuracy or completeness of the data provided by investors or other third parties. Neither Fundrise nor any of its affiliated companies offer tax advice and in no way represent that the results described here lead to any particular tax consequences. Potential investors should consult their personal tax advisor about the tax consequences of their particular circumstances. Neither Fundrise nor any of its affiliates accept responsibility for the tax consequences for an investor in an investment. The publicly filed offer circulars of the Rise Companies Corp. For sponsored issuers, not all of which may currently be qualified by the Securities and Exchange Commission, please visit fundrise.com/oc.

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