Capital Markets Insights

Private Placements are a Competitive Advantage – But They’re Being Held Back by the “Consumer Experience Gap”

Software is eating the world. These were the words investor Marc Andreessen – cofounder of prominent venture capital firm Andreesen Horowitz – wrote back in 2011. In the ten years since, much of his proclamation has come true. Netflix disrupted cable, Airbnb disrupted hotels, Uber disrupted taxis. And fintech is disrupting wealth management.

The traditional investment advisor model is increasingly under threat. On the “safe investing side”, robo advisors like Betterment and Wealthsimple offer access to customized ETF portfolios for a low fee. And for those with a higher risk appetite, trading apps like Robinhood make it easy for investors to actively trade and even leverage themselves through options.

All these consumer-facing fintech apps have one powerful advantage – a seamless consumer experience. A few clicks of the mouse or taps on the smartphone is all it takes.

The result of this “app competition” is significant fee pressure on registered investment advisors. To combat these, investment advisors are experimenting with pricing models and placing a greater focus on providing holistic financial advice and coaching.

These can indeed be helpful. But we would like to draw attention to one underrated competitive advantage investment advisors are not using to their full potential – access to private placements.

The Private Placements Advantage

Private placements offer investors access to opportunities that are difficult to replicate elsewhere. Many of these companies are in the early stage – implying a high return potential. Further, companies in more esoteric industries that could be a harder sell in the public markets (for instance, psychedelics) often make use of private placements to raise capital.

Conditions are prime for private placement offerings to gain traction. Risk appetite is surging as the economy continues to recover from the pandemic. Interest rates remain low, and investors are seeking out new sources of yield. We are already seeing a supply-demand gap in private placements – something we discussed in our previous blog post.

And private placements – except for Reg-A and Reg-CF offerings – have been largely untouched by consumer-facing fintech companies. This means offering access to them should theoretically be a powerful competitive advantage for investment advisors. Unfortunately, this advantage is being hamstrung by the “consumer experience gap”.

Private Placements Suffer from a “Consumer Experience Gap”

In the digital age, it is becoming increasingly obvious that the “investor is the consumer”. Expectations of fast and frictionless transactions may have begun in the online consumer space. But they have since proliferated through every facet of the economy. 

This is what fintech has capitalized on, and why they are so successful. And clearly, higher investment risk is no barrier – just look at Robinhood and options trading. However, one glance at the traditional private placements process shows that when stacked up against these consumer-facing fintech apps, the “gap” is more like a chasm. 

Where investors expect rapid digital onboarding, many must still contend with complex paper-based processes just to be verified as eligible to participate in private placements. The process of subscribing to specific private placements itself can be even worse. Cumbersome back-and-forth is often needed to get the subscription documents in good order. Deal updates are slow, creating uncertainty on the part of the investors.

All these are holding back the competitive potential of private placements.

Narrowing the “Consumer Experience Gap” is Critical for “Future Proofing” Private Placements

In our experience, many don’t see an immediate need to modernize their private placement processes for the digital era. This is a short-sighted view that will come at the expense of the longer term – especially given the clear demographic trends already in play.

Digitally savvy millennials are already the largest generation group in the US. And while it is true that they still only control a small percentage of the overall household wealth, consider that:

  • Millennials’ actually have the highest income of any generation (adjusted for inflation)
  • Their share of national wealth is expected to quadruple by 2030 as their baby boomer parents begin passing down their assets

    And because millennials are still lagging in the wealth race, they are willing to take greater risks to catch up. This has only been amplified by the pandemic. Private placements can fit well into this greater appetite for risk – especially as investors look outside the shrinking public markets for yield. But this won’t happen if the “consumer experience gap” isn’t narrowed. 

    As the Wall Street Journal notes – millennials prefer apps to humans for financial advice. And a study by global research firm Roubini Thoughtlab found that 66% of millennials are likely to fire their parent’s financial advisor when they inherit if those advisors can’t offer what they’re looking for.

    In sum, both the short-term and long-term environment are supportive of private placements as an investment product. For investment advisors, they could be a powerful competitive advantage that could help increase AUM, improve client retention, and make them less replaceable. But the only way for private placements to be as popular as the more digitally friendly alternatives is by narrowing the “consumer experience gap”.

    Capitalize on the Full Potential of Private Placements Through Streamlining and Automation

    Wealth management is innovating. But amid this disruption, private placements are being neglected. This is a cost for those who continue to ignore their true potential – and an opportunity for those who realize the full advantages digitizing the process can offer.

    At Katipult, we help our clients bridge this “consumer experience gap” through our solutions specifically engineered for the private placements process. We enable streamlined investor onboarding and rapid execution of subscription documents – all at a scale that manual processes cannot replicate.

    We’ve already helped  tier-1 institutions like Raymond James, Canaccord Genuity, and TSX Trust Company realize the advantages of streamlining and automating their private placements processes. 

    We can help you do the same. Contact us to learn more.