Ep. 212: Navigating Private Markets with Marcus New, InvestX

Come on in and sit back and relax. You’re listening to Episode 212 of the WealthTech Today podcast. I’m your host, Craig Iskowitz, founder of Ezra Group Consulting. This podcast features interviews, news and analysis on the trends and best practices, all about wealth management technology.

My guest for this episode is Marcus New, the founder and CEO of InvestX. Just give you a quick bio on Marcus, Marcus is a pioneer in the pre-IPO asset class with a career that spans over three decades in the private and public financial markets. InvestX was founded in 2014, before that, Marcus was the founder and chairman of Stock House Publishing, one of North America’s leading online financial communities and a global hub for accredited investors which he exited to a strategic investor in 2019. Prior to launching Stock House Marcus built Stock Group Media, and online information company whose client base consists of the top Canadian brokerage firms, global institutional sales desks and hedge funds.

Marcus has served as the past president of the Vancouver Chapter and Canadian conference chair for the Entrepreneurs Organization and he’s an alumni of MIT’s birthing of giants program. He holds a BA with a business major from Trinity Western University.

But before we get started, let’s talk about tech stacks. At Ezra Group, we’ve seen tech stacks of hundreds of RIAs and let me tell you, most of them are loaded down with tech debt. So you shouldn’t feel too bad about yours. But let’s face it tech debt is like a giant anchor, holding back your business growth.

If you want to free your firm for exponential growth, you should run, not walk to our website EzraGroup.com and fill out the Contact Us form. Our experienced team can evaluate your current tech ecosystem, deliver targeted recommendations, optimize your existing systems and operations or run an RFP and help you implement new software to take your firm to the next level. You can take advantage of our free consultation offer by going to EzraGroup.com.

Topics Mentioned

  • InvestX Unveiled: A 30-Second Elevator Pitch
  • Navigating Private Markets: Trends, Challenges, and Solutions
  • Origins and Vision
  • Navigating Challenges and Opportunities
  • Market Dynamics and Investment Strategy: The InvestX Advantage

Episode Transcript

Craig: I’m excited to announce, our next guest is Marcus New, CEO of InvestX. Marcus, hey man, thanks for being here.

Marcus: Great to be here, Craig. Thanks for inviting us.

Craig: I’m always interested to have interesting players in the space who are doing interesting things that we can talk about for technology for the wealth management space. Where are you calling in from?

Marcus: I’m actually phoning from our Vancouver office today, visiting up in the west coast and moved between there and our New York office but it’s a bit of a hike between the two. But both have their great benefits.

Craig: I like Vancouver although I don’t get to go there very often, but it’s a beautiful place.

Marcus: I say I go one for brains and one for beauty.

Craig: That’s a good that’s a good thing. I’m in New Jersey, so we’re using the power of technology to bring the coasts together on this podcast. So let’s kick it off. Marcus, can you give us a 30-second elevator pitch for InvestX?

InvestX Unveiled: A 30-Second Elevator Pitch

Marcus: InvestX, we give broker dealers a platform to invest and trade in private securities. And we do that two ways. So one is we provide the risk five funds that would be 15 to 20 late stage venture IPO companies in the fund so that Wealth Advisors and brokers and portfolio managers can give an asset allocation to this asset class for their clients. And the second is we have an ATS or alternative trading system, which is like a dark pool that allows for block trading wholesale for institutional clients of shares and private securities.

Marcus: So for example, if an institutional client wanted to sell $50 million of OpenAI, and another institutional client want to buy $30 million, they can match up on our platform in order to be able to do a block trade, and then we help them facilitate price discovery of with matching, helped facilitate offline transaction to clear and settle that trade. So at the end of the day, we help all parts of the broker dealer and their customer groups, from wealth management into private clients, private banking clients and institutional clients to be able to access invest trade in the private markets in a much more effective way than they do today.

Craig: So much like a secondary market for private securities.

Marcus: We do that for sure. Through our wholesale platform, it’s institutional only. So retail investor or something like that could not access that platform. It’s a regulated ATS with the SEC. But we provide product structures like our diversified funds, or we also provide single name funds. So if you wanted to vest in open AI or SpaceX, for example, as a single fund, we also offer that for clients to be able to add those to their portfolio. And you’ll see sometimes, for example, different use cases or, if you’re a high net worth client, or an ultra high net worth client, you want to get access to this asset class.

Marcus: So you might use that fund for from an allocation perspective or you might, for example, be interested in edtech. And so you have a number of companies in education technology and public markets, but you wanted to add some from the private markets because one of the things about the private markets is that’s where the growth rates are. And even as you’ve seen over the last year and a half as the public growth rates have come down, the privates have come down too, for the privates were 30, 40, 50, 60% growth rates and the public’s were 10, 15, 20% and now, the public’s are 2, 5, 8%, right, and then the privates are 20, 30, 40%.

Marcus: If you want growth, you have to be in the private markets. I mean, that’s where growth companies are today, right? They’re not in the public markets. And so, you see, hedge funds recognize that too, think about institutionally where they see how do we get more exposure to growth as part of what we’re doing? We’re also seeing strategies in hedge funds, for example, where they might buy the privates long and short the public, and so different strategies working with where you’ve got different price dislocations happening in those two markets, right, the private markets’ lack of transparency, price discovery bid offer spreads that are gigantic, the public markets massively efficient. You can’t beat the Goldman Sachs computers I used to joke, right so the private markets have a lot of benefits for investing because of the fact that they’re so inefficient. There’s opportunities to make alpha.

Craig: You had mentioned, that you help them clear and settle trades, are you a custodian? How do you settle those trades?

Marcus: We use custodians to do that. But the main construct in private markets, though, is they every company has a different way of how they settle the trade. Because you have to clear on the cap table company. These are private companies. So they’re not using DTC, they’re not using a uniform way right of clearing and settling. What we do is because of our expertise, and our knowledge of the different issuers and how they they settle trades, and how also you have to deal with the shareholder agreements, right, and ROFR and different aspects of those types of things that exist in the private markets.

Marcus: There’s a lot of nuances in the private market. So from our clients perspective, to our broker dealer partners and our institutional partners, we help to facilitate that because we have deep, deep knowledge in terms of how to transact it’s more just process versus something that massively complicated but there are some complications that we help get through those process and they’re typically related to ROFR.

Navigating Private Markets: Trends, Challenges, and Solutions

Craig: Thing you explain to the audience who isn’t familiar with private transactions what a ROFR is? 

Marcus: If you’re a private company, typically the way you raise capital in your capital structure is developed is the initial start of the company, you’d have some common shares that get distributed onto founders, maybe early employees, and then a seed shareholders would come in and give you an initial round of capital and they typically would get common shares as well. So these would all be common vanilla shares that you have in any kind of corporation.

Marcus: Then as you build your business you get access to venture capital that’s coming to get access to venture capital, they would come and start to take preferred shares and preferred shares say that they have certain rights over the common shares, and every time you raise another round, there’s another preferred round, that go on top of the last preferred round. You build this waterfall of rounds that happen and they all have different preferences that create different protections for new money coming in each time. As a result of that, there’s a lot of complications related to how do shares transfer. It’s governed by a shareholder agreement.

Marcus: The shareholder agreement creates different rules and regulations related to these different classes of shareholders. They’re all pretty straightforward at a company, there’s a sharing agreement that sets the rules for how things work. But part of those rules that exist in every company is the ability for certain groups to have a right of first refusal, which is a ROFR over the buying or selling other shares.

Marcus: So for example, Craig, if you and I both participate in the series C round of a company, right, we would have a ROFR that says that if Craig wants to sell I get to buy it first because I also participated in that round. And so myself and the other six investors in that round, we all get the ability to actually say we would like to buy it or we don’t, and if we don’t, then we just say we don’t want to exercise our ROFR and then it would be allowed to be transferred to the other party that wants to buy it.

Marcus: Now, the company also always has a ROFR too. There’s there’s other investors that ROFRs and then the company can always say, You know what, Craig I’m not letting you sell your shares to Marcus who wants to buy them, I’m going to actually ROFR them ourselves, we’re going to buy them from you instead and cancel the shares or do something else with them. So these are things that we have to navigate that take time to go through because at the company they have to go through a usually a board process and things like that to transfer the shares. Whereas in the public markets, it just happens instantly. DTC settles that changes ownership, and everything’s happens and t plus two, right, trade plus two days. So, by the private markets, every company has a different process too typically, and they all have different shareholder agreements. And they all have different ROFRs.

Craig: Which makes things incredibly complicated that everyone’s doing things a little bit differently. Do you provide any stability or common methodology across this on your offering? Liquidity or secondary market trend?

Marcus: Following the trade settlement process? They’re all pretty common. They have nuanced differences, but they’re all pretty common, what has to happen. And so there’s different timing. components like it might take one company six weeks to go through the ROFR process, another company might take three months, another company might take two weeks, so those parts are different, but usually it’s more time driven. When you think about the inefficiencies in the market or the access to the market, this is I think, where we help our partners shine.

Marcus: For example, compliance is the number one issue for broker dealers. I always joke the number two issue for broker does its compliance and number three issues compliance, right. And so compliance being such an important driver, they want to make sure that if we get access to this asset class, which today by the way, if you look at venture backed companies over a billion dollars it’s a $3.4 trillion asset class, it’s a massive asset class that very few people have exposure to, which is another issue another question.

Marcus: But the point is, how do we drive that through to our customers to give that optionality to our customers in a compliant way? We manufacture products like a diversified fund, and single investment vehicles that are done in a compliant way that meet the driving needs of the broker dealer, so that from a compliance perspective, it can be offered to customers and to clients.

Marcus: On the trading side of it, it is around how do we get the ability to to surface a bid or offer to complete a trade in the private markets today? I’ll give you an example Craig, two years ago, the markets were more efficient because there’s so much demand in 2021. It’s almost like the hype cycle, what was happening in the public markets was driving a lot of people to the private markets. And the reason for that was because you could never get the IPO shares. If you look at kind of companies that we invest in, Goldman Sachs and Morgan Stanley, I think underwriter lead underwriter for like 93% of those, something like that. It’s that extreme. You can’t get access to those shares, and so people are going to the private markets with that.

Marcus: Well, then what happened is the public markets rerouted when, when risk free went to like four and a half percent, or it’s almost 5% today. Well, the reality is is that you know, in the private market is so inefficient. If you want to buy a security today in the private markets, you have to get access to information, you have to find the seller at the price point. What we’re seeing is bids and offers and private securities had 20, 40% spreads, institutional investors, and old sellers didn’t want to sell down because they’re private.

Craig: Are you saying the public compared to the private market in the same sector?

Marcus: Correct. So let’s just say let’s take a SaaS business, for example, right back in 2021, SaaS companies were trading in a public sector in the 20s, 20 times sales, something like that the long term average in SaaS businesses if you look at tenure averaged about 7.8 times. And so in the privates they lagged the public’s typically, because you have the illiquidity discount. So instead of being 20, let’s just say there were 14. But nevertheless, the public’s rerated right, the public’s rerated the other way, they actually went down to like five and four times at one point last year.

Marcus: If you’re in if you’re an investor, and you’ve invested in a SaaS business at 12 times, and the public markets are five, how do you sell that without a massive rerating? What happens is they just said, we’re not going to sell it. So what we’ll do is we’ll take two dead years on our performance, because you’ve got to remember the growth is in the private market. So that company continues to grow at 30%, it’s catching up to its valuation, but you got a couple of dead years, it kind of the term that you’re holding that investment, it lowers returns, which is what happens by get don’t need to fire a sailor, and the market went illiquid.

Origins and Vision

Craig: Can you talk a little bit about sort of trends you saw when you started, InvestX, what were you seeing in the market? And what gave you the impetus to launch this new business?

Marcus: When we started the business was I built the kind of Canadian version of Motley Fool, which you may or may be familiar with cover the public equity markets and what we saw happening in private markets where companies are staying private longer. When you looked at it in more detail, sometimes you have to be in it to see it right. And this is what happened for us was that, there was about 10 or 12 institutional investors that were the ones that made all the investments.

Marcus: So if you look at Amazon, it went public at $444 million market cap, Facebook went public at $104 billion, but there was about 10 or 12 institutional investors but the ones that kept investing and so they were making all the returns of these companies, growing and getting bigger by the time they went public. And so and this was Wellington and Fidelity and TPG and others like that, and they’re the same ones there. We said, look, there’s got to be a way for us to be able to get a broader access to investors to get access to this asset class.

Craig: The usual suspects.

Marcus: Well, back then, like in 2013, they hadn’t all developed up that way, but you know, but yes, to some degree, the usual suspects. We saw that the private markets were creating a lot of returns to small group of people, we said, we got to be able to have a broader group of people get access to those markets. Then the second thing we saw, so we saw companies staying private, longer, small group of club investors getting access, the returns were there because the growth rates were there.

Marcus: Then when we looked at the broker dealers, the broker dealers struggling with how do we actually deal with this? Again, going back to our number one priority is usually compliance, right? And how do we do this in a compliant way in a market that’s illiquid, that doesn’t have good transparency, that doesn’t have all these issues that we expect and need in a compliant market environment? And you see in 2021, gently come up with a regulation best interest, regulation BI, so adding regulators more and more to the compliance bucket.

Marcus: So this is what we saw. And then when we saw like, how do you invest in these secondaries, for example, in the private markets, we saw all these other issues like well, how do you find the match? How do you supply buyers with sellers right, how do you find price discovery? What do you pay? In early days, Craig, we would see the same stock trade 25% difference in price in the same week. How can that happen in any rational market where someone paid 25% more for the same security in the same week? That only happens in markets that are massively inefficient. So what we understood was that look, there’s an amazing opportunity to make money in a market that’s inefficient like that, but at the same time, we have to do it in a way very deliberate, that reduces risk that also manages compliance.

Marcus: From that we built investment products to help with our partners so that they give other clients access. And we also have direct clients as well, we have a large number of our clients. And then we also built a trading platform to help them with block trades institutionally. Because as 2021 came we saw as more and more institutions were going into the market too. They knew they need to get exposure to these companies and put them in their portfolio. And we started to get crossover funds, which had been around for a while, but then we start to get hedge funds coming in. We started getting more institutional capital moving into the private markets to get exposure to this asset class and this return profile.

Navigating Challenges and Opportunities

Craig: I’m very familiar with the block trading markets. I don’t understand how it works in the private market. So in a public market, you have got 1000 accounts and you want to buy Apple for all of them and different numbers of shares are combined. I roll that up into one large tray, push it out to Citadel or some large firm, they handle that and send it back to me, then I have to allocate all the shares to all this effort accounts, but it’s easy because they’re public stocks. If these are private securities, they require a lot of paperwork for each investor, how do you block that up and then reallocate that out to other investors?

Marcus: To do that what we do is we use a single purpose vehicle or a special purpose vehicle structure, think of it as like a single panel structure that buys $50 million of Open AI, and then underneath that segments that for our limited partners. Limited partners might put in $500,000 might put in $2 million, or $10 million, or maybe as low as 75 or $100,000 and that’s how that allocation happens. So from the company’s perspective, it’s one trade with an institutional asset manager but below it, like every fund has a number of limited partners that would participate. Our limited partners, we have a large, more limited partners that we have dedicated funds where there’s dedicated capital where we’re just making all the investment decisions, adding it to it, and then we have side cars in effect, are the single investment vehicles where people can invest in a single security.

Marcus: So those are the different ways that that happens. When you look at block trades, though on our ATS or OTC desk if you want to think of it that way, block trades there are point to point. So there’s single fund a single fund it’s institutional only it’s wholesale only. It’s Fidelity selling but represented by Citi. Tiger global being represented by Bammo. They are indicating orders and creating a match and therefore, that trade settles and then but it settles point to point so it’s settling back to Fidelity or Tiger for example, right. Whereas if you think about retail, or wealth management or portfolio management channel, we have lots of smaller customers by smaller meaning, $100,000, $500,000, $5 million, not $25,000 on those kinds of platforms that trade like that.

Craig: What’s your minimum investment size, $50,000 or $100,000?

Marcus: Yeah, that’s right. It depending on the product, $50,000 or $100,000. That’s right. So you’re already talking about it gets a credit product only qualified purchaser product only. At some firms, it’s $25 million in assets and higher sub brands, it’s 5 million higher some firms $1 million higher.

Craig: Can you give me an example of what a direct client is and how their investment will be different will be structured differently?

Marcus: Some states or areas where we don’t have say, a wealth manager or broker dealer in it, we have some clients direct. We have a broker dealer, FINRA dealer that we use for that that’s in all the states and so obviously where there’s partner firms, we direct business to the partner firms in certain states that don’t have it. So we have a number of family offices, ultra high net worth clients that deal with us direct as well again for asset allocation into this asset class, late stage venture pre IPO through our fund structure. And what’s one of the unique things about our funds is our funds compared to most other alternatives, our funds only five years, right, whereas most funds are 10 or 20 years in terms of duration. Ours are five years.

Marcus: One of the unique things about it, too is that we do call capital over two years, but after the second year we returned capital of clients. So every liquidity event through an IPO or M&A or trade sale or an M&A transaction, we return return capital back to clients. So which the unique function of the fund it doesn’t reinvest up to the second year. And so the capital requirements for client is actually much faster in terms of DPI. So, if you look at distributions are paid in capital, we are in a very, very high bracket there and getting clients back capital faster because of the nature of our funds are which is very good for that asset for that group of customers. They like to have capital come back faster than large institutional clients for example.

Craig: Explain to the audience may not be as familiar with private investments, why a five year fund is much better than 10 or 20. What does it mean by returning capital after two years?

Marcus: What happens is that in most private funds if you go to a venture fund or an infrastructure fund or a private equity fund, most of those funds are 10 year funds.They have a four year investment period, then they have this harvest period. If you think about venture, where the companies just take time to grow, right? And then of course adventure. Most of the companies are zeros in the portfolio, but they’re looking for one or two companies to make most of the return for the portfolio. That’s the strategy in venture.

Marcus: Private equity, is different private equity is controlled positions, they buy a majority position, usually 80% or more of a company, and then what they do is much like a mortgage in a house, they use debt to have the business grow faster than the premium that paying for the debt in order to leverage more return back to the company, much like you do with your house, right? You have a 6% mortgage on your home, if your home over time grows faster than that you’ll actually make more money than what you’re paying in the mortgage. So private equity works the same way.

Marcus: In order to have those criteria, though, you have to have longer term, your capital at work longer time, right in order for those effects to happen. In our business, where we’re capturing value is we’re capturing value, in the last three years of the company’s life. We’re targeting, the last three years where the company is still growing quickly. It has worked we’re not trying to take risk of a company figuring out the business and business models, customer and supply chains, all those kinds of things. Those have been figured out in generally what we’re trying to do is capture the last few years of growth before and the discount that exists because the liquid in the private markets and then get the returns post that when they have a trade sale or public events

Marcus: Because of that nature, we’re just naturally presupposed to buying and investing in amazing quality businesses with amazing quality leadership teams, but not naturally at the end of their private life versus at the longer time period. So how does that translate translates that we make the investments in our fund over two years, and then every time there’s a liquidity event, we just returned capital back to clients.

Craig: Can you give me an example of a liquidity event?

Marcus: Airbnb, we invested in Airbnb, we owned it for about two and a half to two and a half years, they went public, that’s the liquidity event. So it takes it from private to now an efficient market, the public equity markets, right. And so we’re able to now be able to capture the returns on that investment by being able to sell those shares in the public markets. So what we’re doing is we’re making an investment in a very inefficient market, and then we’re exiting out in a very efficient market.

Marcus: That’s where there’s great opportunity to make money is because we’re investing when the market is super inefficient private markets, right lack of transparency, price discovery bids and offers hard to find information, very few people have it. And then we’re going out to a market that’s massively efficient and public markets where information everyone, right you can trade on hundreds of percent the lower low costs, everyone’s got data, and this is the arbitrage or we’re capturing is going from an inefficient market to an efficient market and capturing the returns.

Craig: So the only problem with that is if they never get to the efficient market, if they’re stuck in the private markets and can’t get the liquidity, then you’re gonna have a problem selling.

Marcus: So that’s a good point. Typically most private companies, that’s the case in these companies that we invest in, these are typically number one or number two in the world in their area, right? Because these are the best of venture. These are the these are the venture backed companies that are now at round D, E or F. Right? They’re the late stage of the business. They’ve had lots of access to capital get the best investors are well behind them. And usually, as I mentioned, they’re number one or number two in the world their space.

Marcus: If you need to sell something like that, you can sell it to the private markets. Obviously, it’s inefficient. It’s not a great way to sell it, but you can sell in the private markets and we take advantage of guys that are dislocated there. But eventually, they do have a liquidity event because they don’t work or most cases do have a liquidity event because they are backed by the venture capital firms that sit on the boards of these companies.

Marcus: They can only return capital to their clients when there’s an exit event. The only way they can get a true exit event with for their positions that usually sizable if it’s one of the winners is through a public event or through a trade sale. Right and we see most of the necks out that way now sometimes does take longer. If you look at a company like Palantir for example, it took them 17 years before the accident, right? It’s not some are shorter, but for us our average hold period it’s just under three years for an investment.

Craig: Indeed, some firms take a long time to exit. Can you explain what is a trade sale?

Marcus: A trade sale is an M&A transaction. So you’re sold typically to a strategic buyer. So you can be sold to private equity as well. But the companies that we invest in which are growth oriented companies are not typically when private equity buys. Private equity typically is buying more stable slower growth a consistent 20 year cash flow, 20 year businesses like that they want to optimize they want to use the leverage or debt right to be part of the purchase price and then they want to optimize it so that they create the return in growth equity, typically strategic buyers, right so that would buy that company.

Marcus: Example Figma you probably heard that was bought by Adobe, that you know it over it haven’t said overpaid, it paid a high premium because very very strategic right. And so now eventually that company could have went public as well. Like Palantir that went public or an Airbnb that went public, but a lot of them do exit out through trade sale. Because a lot of those big companies, this is how they get their growth. Like if you look at Salesforce, Google does an acquisition a week. I mean, this is how they grow. The internal businesses usually not growing that much they use acquisitions to grow their business.

Craig: We’re actually running out of time, this has gone a lot faster than I thought. Isn’t it an issue with late stage or late stage companies if there are other series D, E or F. And it’s going to be harder to make money because of the high valuations. So isn’t that going to become a hurdle for your investors?

Market Dynamics and Investment Strategy: The InvestX Advantage

Marcus: Well, high valuations is relative to something right. So I think the important thing about anything is price paid has some peer group set that is looking at to determine when that time alone, discipline to investing is important as it is anywhere. And so the way we would think about it would be what is the peer group the public peer group trade at, so the public, let’s just go back to SaaS business. So the public peer group and Assassins today is trading at six and a half times the long term averages 7.8 times revenue sales or sales value. So so if you look at that, if you’re paying 10 times, well, you’d say you’re overpaying today. If you pay 500 you’d say you’re paying a discount to it. That’s better.

Marcus: But the thing you have to look at is those are important almost look at we also look at growth rate. Because if the if the peer group, the public peer group is growing at 15%, and your business is growing 55% Right, in one year, you’re going to be in a in a discount position, right compared to compress it today. The way we like to look at it is how do we look at over three years and how do we look at what we think the accident value multiples will be in that company? Right? And so they’re not that hard to look at because the x values just looked at the concrete. They gotta get concrete right. But say you’ve got some decent level of aptitude for that.

Marcus: The way we look at today if let’s just say today, this is just an easy numbers, if 6 is today’s value price to sales for SaaS businesses, the long term average is 7.8, we look at that business three years from now we’d say, could we make 3x cash on cash return at six right now if we can buy it at a price point that makes us react to cash on cash return at a six multiple and it expands to 7.8 back to the mean, then we’re going to do tremendously well. What that does is it creates a price that you want to pick in the private markets that you want to does. When you look at the data it says look for this company I will pay $27 a share for this company. When someone insults you for $27 not that’s a different issue. Right.

Marcus: So but you know what to pay. That’s the great thing about it is you know what to pay like in the public market that was traded 35 years ago at 27 years today, I’m not buying it right. You wait there but in the private markets. was interesting because the markets so illiquid, we put in these low cost bids like this, or low price bids. And eventually someone actually does sell to you. Because there’s someone gets desperate. They need liquidity and all of a sudden you get hit on a bed. You’re the only bid made in the market and that stock right and you buy at $27 And so this is where you know there’s a great opportunity to be successful investing here.

Craig: Let’s hope so. So surveys have shown High Net Worth investors of over 40% allocation to alternatives on average, a lot of it is in private equity. So is this a strategy that only high net worth individuals illustrate yet you recommend high net worth individuals or even offer mass affluent investors shouldn’t try to emulate?

Marcus: I think that there’s two or three lenses there. Our personal belief is that you know that the wealth gap between the middle class and the wealthy has been created through this mandate, regulatory wise, and I would say from the investment community, the 60/40 equity fixed income split that you should have in your portfolio. And so those have access to alternative products have started to widen the gap because they’re able to have a diversified product said first, especially because interest rates have been so low for 20 years that no one’s made money, and it’s also the highest tax rate. For an effective basis has been a very poor strategy. And the regulators have actually threw this out too, that they have to change these rules because their policy is actually creating more of this wealth gap.

Marcus: So going back to that 100% high net worth ultra high net worth, have exposure, they already have exposure that they don’t need to be told they need to have exposure to it. They have exposure to it, and they’re getting more exposure to it. I think from that construct, if you look at alternatives, there’s different types right? There’s infrastructures, private equity, there’s real estate, there’s growth equity or or late stage venture pre IPO that we invest in, there’s venture capital itself, and they all have different risk parameters and profiles and they all do return profile. I would say Craig, the thing that I’m most excited about in terms of where we are in the investment area, which is pre IPO growth equity, late stage venture, they’re all the same different words for the same era of investing is that the time period is much more effective for most of those clients.

Marcus: So if you’re an institutional client and you’re thinking about investing over 100 years and 25 years, then yes, match into infrastructure, you’ll buy bridges, go buy things that are going to be income producing assets for 50 years makes a lot of sense, right? So but if you are more of a high net worth person or an ultra high net worth client liquidity can be an important part of what happens in your life. You can have a medical emergency but family members, you can have education issues, you have a whole bunch of things that require access to capital, right.

Marcus: So looking at a five year fund matches into that profile a lot more efficiently. And the other piece I like about it compared like venture capital is in venture capital when a company is raising $10 million. They can only choose three investors. They continue through investors. So the best quality investors think about Sequoia and Andreessen, Excel, they get access to the best quality deals because the fact that they’re going to take three investors and you want to have the highest quality names in your cap table, or when you look at a company that’s our average companies like three and a half billion.

Marcus: When you look at that by a $25 million $50 billion position. Lots of people can own that may not last but you know, relatively speaking, right and so so the ability to get access is also valuable, and as a result of that if you invest in venture it’s hard to make money because the top fund managers keep getting the best returns because they get the best access to deal flow most don’t right and so you have to make top quartile financial venture, and so when you look at where we are there’s broader access to product and so we can use different things to create competitive advantage.

Marcus:  We use our ATS to help understand pricing more effectively at markets just as an example so, but there’s different ways we do it. But when I look at the risk profile, right, we don’t have any zeros. There’s no companies that have gone to zero because we’re investing in high quality companies now, the same time there’s no 20 axis, right? So we’re not taking that level of risk, right. So I like lots of singles, right like just make lots of singles and inefficient market capture. Returns, deliver them to clients. It’s a pretty straightforward formula.

Craig: Other you mentioned open AI, they they almost tripled in value just this year. They’re raising funds at almost 90 billion valuation. Yeah. Is that something you see is that the market in the private market certainly can’t describe as frothy these days, considering the great downturn going back since, but since 2001, but $90 billion valuation makes them almost on par with Charles Schwab. Is that reasonable or is that?

Marcus: It’s funny, if you look at somebody’s coming into the private markets, Open AI being one of them now up at 90 billion. But I think it’s like if you look at the S&P 500, obviously, large companies in the world, if you took the private landscape of private venture backed companies, I think it’s like 11 or 13 with it in the S&P 500 are that big. So private companies can be big in the private markets. Just because they haven’t gotten public doesn’t mean they’re not massive inside look at SpaceX, for example, $140 billion, right.

Marcus: AI, the reality is, there’s very few ways to get exposure to AI, pure AI in the public markets. You’ll see in where there’s small supply with real quality players There’s five companies or less, right that are real scale in size so far in AI. There’s lots of small bet small companies, but four or five players or three or four opening eyes one and profits another for example the capital flows there because they recognize that AI could be bigger than the internet. And so, if you think of it from that perspective, well, it’s expensive.

Marcus: There’s no question on any metric. Open AI is also the fastest company to get to a billion in history. So in revenue, so and the transformational change that’s happening that you know, but a speculum This is a speculative play based on valuation, right. No one’s going to say this the value stock. No one’s thinking about the stock, right? So but it’s still insatiable demand for it because you couldn’t literally be worth a trillion dollars. So much different than the video, right? I mean, this is a software business with revenue versus a hardware business too, right. So it’s, and written a video obviously has a lot of other business besides just the tip for AI.

Craig: In my line of work, we see a lot of startups a lot of companies come to us with new ideas. So we catch some of the trends. One of the trends we’ve been seeing is in alternative investment marketplaces like InvestX. So we’ve seen a rash of them, either in very acquisitive like a capital case or the firm’s launching in different areas of alternative investments. Halo, Simon, Luma, Opto, from Joe Lonsdale, Fundrise. So, how does InvestX differentiate yourselves in this crowded, crowded segment?

Marcus: I think anytime you look at kind of broad word of marketplaces or platforms that you have to actually look at what they do, right and everyone kind of does a little bit different things. iCapital, which I think they’ve got an incredible leadership team, a great company, they helped to pioneer the ability for retail investors to get into high quality funds. So if you want to be a Blackstone fund, you couldn’t do that unless you were a very, very large tech or institutional and so they created fund to fund products with Apollo Blackstone companies like this that the average person can get into right but the core of their business is creating fun to fund structures right.

Marcus: So which is very, very different than I want to have access to late stage venture or I want to have block trading of private securities. I mean, these are very different things, right? PACE is very, is much more similar to I capital that way, if you look at Fundrise started off around crowd sourcing crowdfunding, small amounts to do go to real estate and now moved into some other asset classes, but again, very much direct to consumer.

Marcus: And so from us, we don’t want to compete with our customers or our partners or the broker dealers, and the banks and the firms that private wealth client base, we want them to be successful by us providing services, technology and products that help them to be successful and not compete with their customer base, right. All those firms like that they’re direct to customers that way they compete with the banks and brokerage firms, right.

Marcus: Ultimately, we think that the banks and brokerage firms, though, rule most of the capital, right, because they also if you think about institutionally, they can give research away, the soft dollar deals, like all those kinds of things on how things get paid for it can be through trading and transacting and private securities. Because publics are worth basis points now, like four basis points at trade. There’s no money there. Ultimately, there’s different things like that, but everyone’s a little bit different.

Marcus: But I think in terms of, we’re centered on deeply understanding our customer, right, understanding the broker dealer and how to serve that customer so that we can serve all the constituents of the firm, help them to be able to be in the market in a institutional way. That also drives through with compliance.

Craig: Marcus, you said it all, went away over time, but it was just an interesting conversation. Where can people find out more information about InvestX?

Marcus: If you’re a broker dealer, we’d love to talk to you, you can go to InvestX.com. If you are a direct investor in the state where we don’t have broker dealers, InvestX capital which is our fund business. And you can see that as well. There in our portfolio of amazing companies that we’ve invested in. We’d love to talk to you and reach out.

Craig: Marcus, thanks so much for being on the program.

Marcus: It’s great to be here. Thanks, Craig.

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ABOUT ME

The Wealth Tech Today blog is published by Craig Iskowitz, founder and CEO of Ezra Group, a boutique consulting firm that caters to banks, broker-dealers, RIA’s, asset managers and the leading vendors in the surrounding #fintech space. He can be reached at craig@ezragroupllc.com

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