Private investments are broken (an introduction)

“If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.” ― Warren Buffett

Imagine, if you will, a group of elderly men in wool suits arguing loudly with each other at your favourite Lebanese restaurant. They’re nestled in the back, and while you can only make out a small number of the words spoken, you can see occasional handshakes and exchanges of paper. You attempt to get closer but you are blocked by other tables and patrons, and the wait staff insists that you be seated outside where you can’t hear anything.

Would you believe that this is a fairly accurate representation of a $15 TRILLION market where money is directed to the companies that are building the future, fueling global economic growth, innovation, and prosperity?

If this dramatization doesn’t give you some serious FOMO or other concerns (like: you’re not getting into the best deals - aka you are Buffett’s patsy), perhaps consider the inefficiencies that are present here:

  1. Investments are discovered, vetted, and funded based almost entirely on who you know, via extensive “old boy” networks.
  2. If you remember the VC adage “bet on the jockey, not the horse”, you don’t even have to have a good idea if the investors like you!
  3. If you are able to participate via an existing player, you are likely paying high fees to rent-seeking middlemen who add little value.
  4. If you want to enter on your own, there are considerable regulatory and legal hurdles that make your participation difficult at best.
  5. Operations are conducted via outdated and error-prone “pen & paper” methods that increase both the inefficiency and risk of meltdown.

As a result, most investors are unable to help direct capital to companies building the future, and their diverse set of views and insights are lost in the ether.

Some lowlights of private markets

If you think we’re exaggerating for dramatic effect, well, perhaps - but here are some challenges that we are grappling with:

Subscription documents

Subscription documents are designed to facilitate mutual due diligence between investors and funds, but the traditional process is complex and inefficient. These lengthy documents, often exceeding 100 pages, can take advisors weeks to complete, creating delays and introducing errors that further extend the timeline. For investors making multiple allocations, the workload compounds as they must repeatedly provide the same information across different funds.

Investors need a streamlined approach that presents instructions clearly and logically, reducing confusion and mistakes. This is where Opto steps in, providing a single source of truth through an intuitive workflow that cuts down on errors and the need for repetition, accelerating the investment process and giving investors the confidence to more actively participate in private markets.

Sparse and inaccurate datasets

Information in private markets is difficult to come by (in part) because of the infrequency of pricing signals relative to the public markets. Even when it is available, it’s sparse and non-standardized, in terrible formats like PDF and PowerPoint that are built to trap information rather than facilitate its usage.

There are a variety of sources that aim to provide information across hundreds of thousands of funds and companies. Examples include Pitchbook, Preqin, and Crunchbase. While these sources play a critical role in the diligence process, the data collection methodology of FOIA requests, public scraping, and self-reporting leads to poor data quality and inconsistent reporting across available managers and funds.

Investors want quality insights that can drive investment decisions. Our diligence team is equipped with technology to help advisors and their investors find suitable funds.

Fund admins and other ecosystem players as rent seekers

Fund Administrators are required parts of the private markets ecosystem if you want to transact, yet they offer little by way of additional value. Essentially, they are rent seekers without an innovation culture or technological thinking - instead optimizing for “where can I layer in the most fees/capture the highest margin without thinking much.”

While we’re singling out these players, we think that legacy financial providers in the private markets space - be they under the surface or marketing directly to advisors, like Allocate, CAIS, iCapital, PIMCO and others - are focused on their own bottom lines at the expense of driving alpha and/or providing a good customer experience.

Translating into what investors need to play in private markets

Enumerating each challenge in a vacuum is one thing, but taken together they represent an almost insurmountable barrier for advisors to play in private markets. At a high level, they have to:

  1. Gain access to private markets opportunities
  2. Develop the expertise to assess and select investments
  3. Hire people to fulfill the transactions and perform the operations required
  4. Communicate with clients about the opportunity and how the investment is performing
  5. &c. &c.

Opto’s reason to exist is to provide solutions to deal with all of this… and it’s not possible without the fruitful marriage of world-class software and financial professionals.

For disclaimers, visit https://www.optoinvest.com/disclaimers.