The S&P 500 recently posted its worst first half in 50 years, and The Fed abruptly ended a bear market rally with the Jackson Hole meeting. Startup prices, too, have plunged. Forge Global, a secondary market, has seen startup prices on its platform drop nearly 20% in February and March compared to the fourth quarter of last year.
In times like these, retail investors tend to sell first and ask questions later, and this time is no different. Venture capitalists are taking a different tack; They’re rushing to buy up depressed assets while they still can, and they’ve already raised the equivalent of two-thirds of last year’s fundraising in the first half of 2022.
The adage is true: when everyone panics, that’s usually the best time to buy. And that’s exactly what VCs are doing.
In the short-term, most economists predict we’ll be entering a recession. While The Fed is attempting a “soft landing,” interest rate hikes have, historically, almost always caused a recession. Moreover, with persistent 40-year-high inflation, rate hikes may be even more painful.
Naturally, this is bad news for asset prices in the short term. A recession means reduced consumer spending, layoffs, corporate bankruptcies, and generally weak economic activity.
That said, venture capitalists have a lengthy time horizon. That’s why, even though the current market conditions may be unfavorable for startups, VCs are still bullish on the long-term prospects of the startup ecosystem.
What’s more, a downturn creates a “shake out” of great talent, which could lead to a surge in the formation of new companies. For example, the dot-com crash of the early 2000s gave birth to some of the most successful companies in recent history, including Google and Amazon.
VCs continue to invest in the face of an impending recession isn’t just a fluke. Research by Neuberger Berman Group shows that private equity funds fared better than public markets in the dot-com bubble and the Great Financial Crisis. Moreover, stocks are more likely to face catastrophic drawdowns during recessions than private companies.
The belief that venture capital is inherently riskier than other asset classes doesn’t bear out in reality. Of course, individual startup investments are indeed incredibly risky. But when you diversify across thousands of companies, such as through a VC fund of funds, the dispersion of returns smooths out, and the risks become more manageable, to the point where VC can be a less risky investment than stocks.
The longer holding period of VC funds allows them to “ride out the storm” and wait for markets to recover. At the same time, a trillion dollars in dry powder is waiting to be deployed in the VC ecosystem, providing a major boost to startup activity in the coming years.
Another tailwind for VCs is implementing the buy-and-build strategy, which has become increasingly popular in recent years. In this strategy, VCs take the opportunity during a downturn to buy up struggling companies at a discount and then integrate them into their portfolio companies. This provides a quick shot of growth for portfolio companies and helps them consolidate their market position.
With Gridline, more investors can access these opportunities and take advantage of the potential stability VC can bring to a portfolio. Further, the SEC’s new ‘accredited investor’ definition opens up these opportunities to a wider range of investors.
In the 2008 recession, seed investing showed continued rapid growth. More recently, private equity firms posted a record $1.4 trillion in dry powder. That’s equal to 100,000 normal-sized deals. Simply put, there’s still plenty of money to go around. This is evidenced not just by continuing investments made by large VCs, such as Drive Capital and Sequoia, but also by the high number of new funds being raised.
So while the current market conditions may be tough for startups, don’t count on VC to dry up. There’s still plenty of money to be made in the startup ecosystem, even in a recession.
For many middle market firms, there is a significant opportunity in running a buy-and-build strategy, in which you purchase a “platform” company as the initial investment into an industry to then add on to the platform via the acquisition of smaller firms that are synergistic to the core business’s operations. The purchase of smaller, “add-on” companies is typically made at lower valuations (the premium is paid on the platform purchase). It provides the added benefit of multiple arbitrages, or the ability to purchase at a lower multiple (valuation) and realize the benefit of multiple expansion via both scale and operating efficiencies.
The current market environment is creating opportunities to scale platforms, especially in a fragmented industry, with private market valuations recalibrating due to the dip in public markets. Many of these add-on acquisitions are founder-led businesses, and with a tough economic outlook limiting future growth potential, founders are looking to cash out.
Additionally, as the recalibration has extended to venture-backed startups, private equity firms can target software companies held in venture portfolios that may be unable to raise additional capital. Venture capital firms are typically paid on total fund returns (not just on a deal-by-deal basis). They will likely market these businesses for sale to realize some return rather than let them fail (anything is better than zero).
This creates a unique opportunity as the traditional playbook focusing on operating efficiencies, i.e., product-pricing strategies, input cost controls, data-driven sales and marketing, and streamlined back-offices, can now be enhanced by acquiring vertically-focused software that can transform a traditional operating business into a high-growth, high-margin, tech-enabled platform.
Fidelity Investments recently announced the launch of two new liquid alt funds, Fidelity Advisor Macro Opportunities Fund ($FAQFX) and Fidelity Advisor Risk Parity Fund ($FAPZX).
Liquid alts saw record inflows in 2021, totaling over $38 billion. Fidelity’s new funds are just the latest in a string of offerings from asset managers looking to get in on the action. This year through May, liquid alts have seen over $21 billion in inflows.
But what exactly are liquid alts, and how do they differ from their illiquid counterparts?
Liquid alts are mutual funds or ETFs that provide diversification and downside protection through exposure to alternative investments. Unlike traditional alts, which can only be bought and sold on specific dates or after a holding period, liquid alts can be bought and sold daily. This makes them much more accessible to retail investors, who often can’t meet the large minimum investment requirements, or the accredited investor status needed to invest in traditional alts.
Private equity funds, for instance, often come with $25 million minimum investment requirements and 10-year holding periods. Investors also must be accredited, meaning they have a net worth of $1 million or an annual income of $200,000. By contrast, liquid alt funds often have no purchase minimums, retail share classes, and daily liquidity.
Liquid alts addressed some of the criticisms of traditional hedge funds, namely high fees and a lack of liquidity, while providing diversification and upside potential. Retail investors seek alternative investments as we enter a low-yield environment with rising interest rates and sky-high inflation fears.
Liquid alts, however, are no panacea. For one, there is the risk that a liquid alt fund will not be able to replicate the performance of its illiquid counterpart. This is because, by definition, liquid alts are less invested in actual alternative assets and more exposed to public markets.
The illiquidity of hedge funds also protects redemptions, as investors can only pull their money out on specific dates or after a holding period. This is not the case with liquid alts, which can be redeemed daily. Selling pressure from redemptions can lead to forced selling and fire-sale prices, leading to lower returns for investors.
Some funds in the liquid alts category are down 10% yearly, and retail investors aren’t known for their patience. They tend to chase performance and quickly pull the plug when things go south. This can lead to even more volatility for liquid alt funds.
Liquid alts funds come in various flavors, with strategies designed to provide diversification and downside protection. Some popular strategies include long-short equity, nontraditional bonds, market neutral, managed futures, multi-alternative, bear-market, and multi-currency.
Equity market-neutral funds, like the AGFiQ US Market Neutral Anti-Beta Fund ($BTAL), seek to provide exposure to the equity market while hedging out the beta or market risk. The fund does this by taking long positions in stocks that are expected to outperform the market, such as H&R Block, and short positions in stocks that are expected to underperform, such as Block and Upwork.
Fidelity’s new Advisor Macro Opportunities Fund is an active management fund that can go long or short, aiming to achieve returns through skill and active allocation.
Investors should understand that liquid alts are not a silver bullet. They come with risks and challenges, but they can be helpful for diversification and downside protection. Investors should carefully evaluate the fund’s strategy, fees, and performance when considering a liquid alt fund.
Since the first index funds in the 1970s, investing in a diversified basket of stocks has been lauded as the safest and most reliable way to grow wealth over the long term. Index funds have outperformed actively managed funds for decades, and a strong body of evidence supports the notion that the vast majority of stock pickers cannot beat the market.
But what about private equity? Does the same hold true for buyout firms? The short answer is no. Buyout firms have outperformed public markets by a wide margin over the past few decades.
According to a University of Chicago analysis, “buyouts have consistently out-performed public markets,” with an average net IRR of 14% and a PME of 1.20. PME, or the public market equivalent, compares investment in a private equity fund to an equivalent investment in a public market benchmark. An S&P article re-iterates that “US small-cap buyout funds outperform mega vehicles.”
This outperformance holds in bear markets as well. Only 2.8% of buyout funds historically experienced catastrophic losses during recessions, compared to 40% of stocks.
There are several reasons for this outperformance. One is that buyout firms tend to be nimble and can take advantage of market dislocations by buying cheaply and selling when the market recovers. Another reason is that buyout firms are often experts in turning around struggling businesses. They have the capital, the management know-how, and the operational experience to make these businesses profitable again.
The outperformance of buyout firms relative to the public markets is especially pronounced in small-cap companies. This is partly because small-cap companies are less researched by the market and offer more opportunities for buyout firms to find hidden value.
The access constraints of private equity can also lead to outperformance. Because buyout firms often invest in illiquid securities, they are not subject to the same kind of short-term pressures as publicly traded companies. This allows them to take a longer-term view and make decisions that may not be popular in the short term but ultimately benefit the company.
Considering the J-curve phenomenon of private equity, in which returns are negative in the early years but become increasingly positive as the investment matures, it is not surprising that buyout firms have outperformed the public markets in the long run.
The high minimum investment sizes and a limited number of investors also help avoid crowding effects that can drive down returns in the public markets.
Uncertainty around valuations, inflation, and interest rates has put pressure on buyout firms. Nonetheless, a July 2022 Bain report shows that the 18-month total deal value of $1.7 trillion is by far the strongest in the industry’s history.
While typically experiencing lulls in downturns, mergers and acquisitions have been one of the few consistent bright spots for private equity. A Fortune report highlights that tech M&A in 2022 is up 58% yearly, to $272 billion. After all, $3.4 trillion in dry powder provides ample fuel for dealmaking. Downturn-era dealmaking presents an especially attractive opportunity for buyers, as many companies will be forced to sell at a discount.
It’s no surprise that firms that made active acquisitions in the 2008 downturn outperformed those that did not, growing at an average of 16.9% over five years, compared to just 4.9% for other companies.
Private equity should be an integral part of their portfolio for investors looking to generate superior returns. With a long history of outperformance and a track record of resilience in downturns, private equity provides the potential for strong risk-adjusted returns.
While the minimum investment requirements and illiquidity restrictions of private equity can make it difficult to access for some investors, platforms like Gridline make it easier for individual investors to gain exposure to this asset class.
An unfortunate set of dominos began to fall in early 2020. Lockdowns, and ensuing unemployment, compelled central banks to flood the markets with liquidity. As economists predicted to a T, this unprecedented quantitative easing led to 9% inflation. To fulfill the other side of its mandate, The Fed had to reverse course and raise interest rates. The resulting market turmoil caused both public and private valuations to decline sharply.
While private markets have remained fairly resilient, with Q2 2022 seeing VC totals higher than before the pandemic, many founders are looking for alternative, less dilutive forms of funding.
According to the LTSE 2022 Future of Equity Report, over a third of founders are now looking for non-dilutive funding, such as government grants or revenue-based financing. Non-dilutive funding simply refers to capital that doesn’t require owners to give up equity or ownership in their company.
Securing capital becomes more challenging in a downturn, with VCs advising founders to “plan for the worst” and “avoid the death spiral.”
In today’s market, as valuations are coming down, founders and business owners are more interested in flexible capital that doesn’t require them to give up control. Falling valuations also mean that for any given level of funding, founders will have to give up more equity than they would have just a year ago.
Market volatility has forced many startups to reevaluate their burn rates and runway. With the future more uncertain than ever, founders are understandably reluctant to give up any equity or control over their companies.
One Entrepreneur article discusses a founder from Cleveland who used non-dilutive funding to raise $3.2 million for 29.3 percent of the company. Had the founder employed a mix of dilutive and non-dilutive funding, he would have raised just $2.3 million for 42.2 percent of the business.
Of course, dilutive and non-dilutive funding aren’t mutually exclusive. In many cases, combining the two will be the best way to finance a company’s growth. As a CB Insights report explores, a track record of non-dilutive capital “indicates that a company has hit milestones linked to product development and financial performance,” which can make it easier to raise dilutive capital down the line.
Government grants are one popular form of non-dilutive funding. The Small Business Administration (SBA) provides several federal grants: research and development (R&D), management and technical assistance, COVID-19 relief options, community organization grants, and more.
For example, the Paycheck Protection Program (PPP) was a type of small business loan created in response to the COVID-19 pandemic. Businesses could apply for these loans, which were forgiven if they used them for qualifying expenses, like payroll or rent.
Another popular non-dilutive funding option is revenue-based financing (RBF). With RBF, investors provide capital in exchange for a percentage of future revenue. SaaS companies often use this financing type, as it’s easy to predict and track recurring revenue.
Further, venture debt is another form of non-dilutive funding that has been gaining popularity in recent years. Venture debt is a loan backed by a startup’s equity. This type of financing can be helpful for companies that need to make large one-time purchases, like equipment or real estate.
As recent surveys indicate, non-dilutive funding is rising as founders seek to preserve equity and control in their companies. While dilutive funding will still play a role in many startups’ growth plans, non-dilutive options are becoming increasingly popular.
Government grants, revenue-based financing, and venture debt are all popular non-dilutive funding options. As the market continues to evolve, we expect to see more companies take advantage of these financing options.
Both the dot-com bust of 2000 and the subprime mortgage crisis of 2007-2009 were watershed events. In each case, a long bull market ended abruptly, asset values plunged, and widespread panic set in. While M&A activity naturally slows during a recession, some companies see opportunity where others see only trouble. Deals done during downturns can create large amounts of value.
A PwC analysis of public market returns found that firms that announced acquisitions during an economic crisis delivered over 7% higher returns than the relevant S&P 1500 sector average in the following 12 months.
A Harvard Business Review article confirms this finding: In a study of the 2008 Fortune 1,000 list, the TSR (Total Shareholder Return) of those that had made active acquisitions grew at an average of 16.9% over 5 years, compared to just 4.9% for other companies.
Of course, not all M&A deals are created equal. Value creation depends on the quality of the assets being acquired, the strategic rationale for the deal, and how well it is executed. But for companies with strong management teams and a disciplined approach to M&A, a downturn can be an opportunity to position themselves for long-term growth.
Whether or not we consider acquisition-related growth, private markets have outperformed in recessions.
In both the dot-com bubble and the Great Recession, private equity funds had a less significant drawdown and a quicker recovery than the stock market. In the decade following the dot-com crash, private equity returned a solid 7.5% average, compared to just 0.08% for the PME index.
Adding to this, only 2.8% of buyout funds experienced catastrophic loss during recessions, compared to a tremendous 40% of stocks.
Clearly, public markets aren’t a safe place to be during an economic downturn. Bonds, too, lack the returns even to match white-hot inflation. Cash, of course, rapidly loses value. This is where private markets can fill the void.
In sideways or bull markets, private markets also outperform. A Cliffwater analysis of PE investments in a 16-year period, including two bear and two bull markets, shows that PE outperformed public equities by 440 basis points yearly. It’s no wonder, then, that 90% of LPs expect private equity to continue outperforming public markets, according to McKinsey.
This outperformance has become even more pronounced in recent years. Since 2017, private equity funds generated an extra 83 cents per dollar invested, according to a study by Hamilton Lane. Private markets also show resilience in this year’s downturn, with median post-money valuation still rising across most stages.
As the analyses above shows, private markets already offer better risk-adjusted returns than public markets. But M&A can help private companies drive even more value.
Fundamentally, an acquisition is an investment. The acquirer seeks to generate a return on investment by growing the combined business. An acquisition can also serve other strategic objectives, such as entering new markets, adding new products or technologies, or increasing market share.
When done well, an acquisition can be a powerful engine of growth. Private market investors will benefit from several macro trends that are tailwinds for M&A activity. For example, supply chain disruptions are causing businesses to reconsider their reliance on just-in-time, single-source providers, and some are seeking transportation fulfillment acquisitions.
So-called “disruptive M&A,” or non-tech buyers acquiring tech companies, is another major trend. This has been driven by the belief that digitization is pivotal to success in nearly every industry. McKinsey research shows that digital entrants have rapidly seized 47% of digital revenue across regions and sectors. Finally, a $3.4 trillion dry powder war chest is another reason to expect strong M&A activity in the coming years.
These trends are coming to a head just as private market valuations are becoming more attractive, presenting an opportunity for private companies to buy assets at a discount.
M&As tend to ebb and flow with the stock market. But there’s one sector that has, so far, been surprisingly immune to this pattern: technology.
Despite the recent bear market, tech M&A activity is still going strong. As Fortune reports, tech M&A in 2022 is up 58% year over year, to $272 billion. From Broadcom’s $61 billion purchase of VMware to Microsoft’s $69 billion Blizzard acquisition, several big-ticket items have already gone through.
The reasons for this are front and center: first, this recession is likely to be short and shallow; second, businesses have over $3 trillion in dry powder; and third, as we’ve highlighted, downturn-era M&A can create significant value.
With so much capital sloshing around, it’s no surprise that valuations are high, and competitive bidding drives up prices. In this environment, M&A is often the best way to snag top talent, technology, and market share. Private market investors should note that downturns may be painful, but they ultimately create opportunities for those who are prepared to take advantage of them.
While private markets and M&A activity can create significant value for investors, an institutional-grade approach is needed to take advantage of these opportunities even in downturns.
This begins with creating a diversified portfolio that can weather various market conditions. Without a diverse set of investments, a downturn in any one sector, geography, vintage year, or asset class can decimate a portfolio.
With adequate diversification, it’s possible to achieve dispersion of returns similar to that of public markets. In other words, VC returns are far more predictable and dependable when a thoughtful and structured approach to portfolio construction is employed.
Institutional-grade due diligence on each fund is another critical piece of the puzzle. This includes a review of the fund’s team, performance, philosophy, investment process, and intangible factors such as perspective and passion.
Moreover, a long-term mindset is essential. Historic VC returns show that the bulk of the value is created in a fund’s later years in a J-curve phenomenon.
Executing this institutional approach, however, is easier said than done. Many private equity funds come with a $25 million minimum, and a diversified portfolio requires investing in several funds. For most individuals, this simply isn’t possible. High fees exacerbate the issue, as they can quickly eat into returns.
Beyond investment minimums, fund access is often limited based on personal relationships or other factors. This is why working with a platform like Gridline is essential. We provide access to a curated selection of top-tier private equity and venture capital funds so that you can build a diversified portfolio with lower minimums. We also charge lower fees so that you can keep more of your returns.
With Gridline, you can get the institutional-grade approach to investing in private markets that you need to drive value in any market condition.
Investors are all too familiar with the risk of inflation eating away at the purchasing power of their portfolios. But what about the risk of stagflation?
Stagflation is a period of slow economic growth and high inflation. It can erode the value of portfolios, particularly those heavily invested in stocks and other assets sensitive to economic growth.
Fortunately, there are ways to mitigate the risk of stagflation. One is to invest in alternative assets such as private equity, which can perform well in a low-growth environment.
In this article, we’ll take a closer look at the risk of stagflation and how alternatives can help investors weather the storm.
The roots of stagflation can be traced back to the end of World War II. America had emerged from the war as the world’s dominant economic power. But, as other countries began to rebuild, they challenged America’s supremacy. This was compounded by the fact that America’s domestic economy was beginning to show weakness.
In response to these challenges, America’s government pursued a policy of Keynesian economics. This meant stimulating the economy through government spending. While this may have kept the economy afloat in the short term, it led to ballooning budget deficits and high inflation.
The oil shocks of the 1970s were the final straw. America depended heavily on imported oil, and the economy went into a tailspin when prices spiked. Families struggled to make ends meet, and there was a general feeling of economic malaise.
It wasn’t until the 1980s that America began to recover from stagflation. The policies of President Ronald Reagan helped to turn the economy around and set the stage for a period of sustained growth. However, the scars of the stagflation era were deep, and many families never fully recovered from the financial hardships they endured.
The US consistently sees 40-year-highs in inflation, at a 9.1% clip. Moreover, US GDP fell at a 1.6% pace in the first quarter, below analyst expectations of a 1% gain. At the same time, worker productivity fell 7.5%, representing the fastest decline since 1947. In the second quarter, the economy fell another 0.9%.
Deutsche Bank and the Bank of America warned of a potential recession. Even more optimistic projections have the odds of a U.S. recession at near 50% in the next two years, up from 35%.
Stagflation isn’t just about high inflation and low economic growth. It’s also about low returns on many investments. In a stagflationary environment, bonds offer little protection. They can lose value as inflation erodes the purchasing power of fixed payments. Similarly, stocks tend to underperform in stagflationary periods. This is because high inflation reduces corporate profits, while at the same time, high-interest rates make it more expensive for companies to borrow money.
Investors who are looking to preserve their capital would be wise to consider alternatives, such as private equity, which has the potential to perform well in a poor economic environment. As Bain describes, “in the decade following the dot-com crash, the PME index’s annual return fell to 0.08%, while private equity maintained a 7.5% average.”
Gridline enables investors to access a curated selection of professionally managed alternative investment funds. This exposes non-public assets with lower capital minimums, transparent fees, and greater liquidity. Gridline’s mission is to open up access to top-quartile private market alternative investments, which can perform well in a low public market return environment.
Section 1202 of the Internal Revenue Code (IRC) provides tax benefits for qualified small business stock (QSBS). This tax break was designed to encourage investment in small businesses by reducing capital gains taxes.
QSBS can be eligible for a capital gains exclusion of up to 100%. However, specific requirements must be met to qualify for this exclusion.
First, a Qualified Small Business must be an active C Corp (not an S Corp) incorporated in the United States, with less than $50 million in gross assets before and after the stock is issued. A QSBS is any stock acquired from a QSB after August 10, 1993, when Section 1202 was originally enacted.
There are also a few industries that are not eligible for QSBS status. These include the broad group of “services” or any business where the principal asset is the reputation or skill of its employees. QSBS does, however, include investments in technology, research and development, and manufacturing. Some states don’t offer QSBS exclusion at the state level, including California, Mississippi, Alabama, Pennsylvania, New Jersey, and Puerto Rico.
To qualify for the QSBS tax benefit, shares must be purchased at the original issue (not on the secondary market) and held for at least five years. Additionally, the investor cannot be a corporation, and the stock must be acquired with cash or property or as compensation for services.
Finally, at least 80% of the company’s assets must be used in the active conduct of one or more qualified trades or businesses.
Section 1202’s Small Business Stock Capital Gains Exclusion describes the tax benefit in detail. In general, the benefit allows non-corporate investors to exclude a portion of the gain from selling QSBS as long as specific requirements are met.
The amount of gain that can be excluded depends on when the QSBS was acquired. For QSBS acquired between August 11, 1993, and February 17, 2009, the exclusion is 50%, and 7% of the excluded gain is subject to alternative minimum tax (AMT).
For QSBS acquired between February 18, 2009, and September 27, 2010, the exclusion is increased to 75%, but 7% of the excluded gain is still subject to AMT.
Finally, for QSBS acquired after September 27, 2010, the exclusion is 100%, including gain excluded from AMT and net investment income tax (NII).
Meanwhile, there are limits on the total amount of gain that can be excluded. The federal government currently allows for a $10 million cumulative limit and an annual limit of 10 times the basis of QSBS sold during the year.
Importantly, taxpayers can claim the entire excluded amount in one year or spread it out over multiple years.
For example, consider a single investor with an ordinary taxable income of $500,000. This puts them in the highest tax bracket for capital gains, which is currently 20%. Assume they sell qualified small business stock, purchased in 2011, five years later, with a realized profit of $100,000.
Typically, this gain would be subject to a capital gains tax of $20,000. However, because the stock qualifies for the best QSBS treatment, the investor can exclude 100% of their capital gain.
This only applies if all the guidelines mentioned above are met. For instance, if that investor was in California, they would not qualify for QSBS status and would instead be subject to state capital gains taxes.
The bottom line is that QSBS can offer tax benefits for investors, but it’s essential to be aware of the requirements and consult with a tax advisor to be sure your situation qualifies.
John Bogle, the founder of Vanguard, has been called “the father of indexing.” In 1976, he launched the Vanguard 500 Index Fund, which tracked the performance of the Standard & Poor’s 500 Index.
This was a revolutionary idea at the time. Before this, most investors only had access to mutual funds that fund managers actively managed. These funds typically came with high fees and didn’t always perform as well as their benchmark indices.
Bogle realized he could offer investors a low-cost way to get diversified exposure to the equity market. With the launch of the Vanguard 500 Index Fund, Bogle disrupted the mutual fund industry. He showed that offering investors a better product at a lower cost was possible. And in doing so, he helped make investing more accessible for everyone.
Today, Vanguard is one of the largest asset managers in the world, with over $7 trillion in assets under management. The company offers various products, including index and exchange-traded funds (ETFs).
Economists admit that the rampant inflation of the past year isn’t transitory, and it’s possible we haven’t seen the worst. This has renewed a flight to private markets where investors seek assets that can protect their purchasing power and generate real returns.
But it’s not just inflation driving this move into private markets. Even with interest rates rising from historically low levels, they still provide extremely low returns. This means that investors are searching for yield in other places.
Private equity, real estate, and other illiquid assets have historically outperformed public markets. For example, over the past two decades, annual leveraged buyout returns outpaced global equities by more than 10 percent on average.
Institutional investors have been allocating more of their portfolios to private markets in recent years as they seek higher returns. As individual investors become more sophisticated, they’re also starting to allocate more of their assets to alternatives.
However, investing in private markets has traditionally been difficult for individuals. The process is often convoluted and time-consuming. And because these assets are not traded on public exchanges, they can be difficult to value.
Moreover, minimum contributions for private equity and real estate funds can be quite high. For example, some private equity funds have minimums of $25 million or more. This effectively shuts out many individual investors from these types of opportunities. Further, considering the importance of diversifying across funds, these high minimums limit an investor’s ability to build a diversified portfolio.
Gridline was founded to make alternative investments more accessible for everyone. The company has created a platform that allows investors to discover, track, and invest in private equity, venture capital, and other alternative assets.
Gridline has also digitized the process, from sourcing deals to investment committee approval. This streamlines the process and makes it much easier for potential investors to get involved.
But perhaps most importantly, Gridline has lowered the minimum contribution requirements for many of its funds. This enables a wider range of investors to access these assets. And because Gridline offers a diverse selection of funds, investors can build a well-diversified portfolio without committing a large amount of capital.
In many ways, Gridline is following in Vanguard’s footsteps. Like Vanguard, Gridline is focused on making investing more accessible for everyone. And by offering a better product at a lower cost, Gridline is changing the investing landscape.
Try out Gridline today and see how easy investing in private markets can be.
It’s no secret that investors are always looking for the next big thing. Whether it’s a new company or technology, they want to be on the ground floor and reap the rewards when it takes off. This is where angel investing and venture capital come in.
Angel investors invest their money in start-ups, usually in exchange for equity. They take on more risk than traditional investors but can also make much more money if the company succeeds.
On the other hand, venture capitalists pool together money from different investors and invest it in early-stage companies. They tend to be more hands-off than angel investors, but they can provide more resources to help a company grow.
Many people see angel investing and venture capital as two sides of the same coin. Both involve taking a risk on a young company, and both can potentially give you a significant return on your investment.
The critical difference is that angel investors are betting on the founder, while venture capitalists are betting on the business. Angel investors tend to invest smaller amounts of money than VCs and are more likely to be involved in the company’s day-to-day operations.
This is because angels invest in the very early stages of a company when the founder is still trying to figure out the business. They’re more likely to invest in a company because they believe in the founder’s vision rather than because they think the business will be successful.
VCs, on the other hand, usually invest later on in a company’s life cycle. They tend to put more money into companies they think have a good chance of becoming profitable.
This doesn’t mean VCs don’t care about the founder’s vision. But they’re more likely to invest in companies with a clear path to profitability rather than those relying on intangibles like the strength of the founder’s relationships or their ability to execute their vision.
Because of this, there are around 300,000 angel investors in the US, compared to fewer than 2,000 VC firms. According to a study by the University of New Hampshire, the average angel deal size in 2020 was $392,025, for 9.6% equity with a deal valuation of $4.1 million. That said, angel deals can be much smaller—even just $15,000 from friends and family.
On the other hand, VC rounds range from a median of $10 million in Series A to mega billion-dollar rounds at later, pre-IPO stages.
Many investors choose to invest in both angels and VCs. This can be an excellent way to diversify your portfolio and expose you to different stages of a company’s life cycle.
If you’re investing in VCs, you usually invest in later-stage companies with a higher chance of success. But this also means you’re missing out on the potential upside of investing in a new start-up.
Angel investing can give you access to start-ups that might not be able to get funding from VCs. And because you’re investing in the very early stages of a company, you can make a much larger return if the company is successful.
Of course, there’s also more risk involved with angel investing. You could end up losing your entire investment if the company fails. But for many investors, the potential rewards are worth the risk.
There are a few reasons why it makes sense to invest in both angels and VCs:
Of course, some risks are also to consider before investing in angels or VCs. But for many investors, the potential rewards outweigh the risks.
To gain exposure to these earlier-stage companies and reap the potential rewards, consider investing via Gridline. As a digital wealth platform, Gridline provides access to a curated selection of professionally managed alternative investment funds with lower capital minimums, fees, and greater liquidity. You can build a diversified portfolio of private market assets more efficiently.