With historically low rates on bank deposits, investors of all sizes are looking elsewhere for investment opportunities. Combined with the ongoing demand for diversification & higher yields, alternative investments are shining brightly in FinTech as a key growth sector. Traditional asset managers are facing challenges in retaining investment dollars, while their non-traditional counterparts are providing higher returns (uncorrelated to the market). Many of the industry’s established providers are slowly starting to enable access to new options (most notably with exposure to cryptocurrency portfolios).

As this demand grows further, new fintechs are emerging globally providing access to new asset classes with lower minimums for retail investors. Leveraging enhanced onboarding flows, data insights, and infrastructure, alternative investment firms are expanding long-term wealth building for all.

WHAT IS AN ALTERNATIVE INVESTMENT?

Alternative investments are generally any asset class that doesn’t belong to cash, stocks and bonds (aka traditional asset). These non-traditional choices have a varied range of risk and return with key differentiators of liquidity, and correlation to public markets. Up until the last 5-7 years, alternative investments weren’t publicly listed for retail investors to participate.

Restrictions from regulatory agencies and high funding thresholds/minimums kept alternative investments available only to high net worth individuals, family offices, and institutions. The private nature of these offerings comes with limited government oversight and reporting requirements, which can make participation and disclosures opaque for inexperienced investors.

In April 2012, President Obama enacted the Jumpstart Our Business Startups (JOBS) Act to help promote small business and startup funding by easing federal regulations. Initially, this helped fuel crowdfunding campaigns among retail investors. Its impact also opened access to alternative investments to all investors by not requiring previous requirements or accreditation.

Last November, the SEC approved increases to Regulation Crowdfunding (Reg CF) to $5M and Regulation A+ Tier II to $75M. The updates help companies raise through these non-traditional fundraising paths without added restrictions. There are now more opportunities to boost new capital markets via crowdfunding and Reg A+.

Some of these alternative investment options include private equity & placements, hedge funds, real estate, futures, and physical metals.

How Alternative Investment Platforms Work

The combination of direct transfers and Special Purpose Vehicles (aka SPVs) provide the product program design behind today’s alternative investment platforms. Investors are given ownership interest in private placements and listed on the capitalization tables of new companies. The purchase converts into a limited partner (LP) stake in SPVs, which can be targeted in a single or multiple investments across companies.

New fintech platforms are providing the user experience and back-office support as fund administrators. Key services include maintaining the ledger of record, financial reporting, and access to alternative data. This allows a company to issue and account for new shares and options electronically, and account for any type of transaction on existing shares, options, or other entries in its cap table in real time.

The increasing amount of data in the sector is typically fragmented and needs to be properly managed, reviewed, and utilized for decisioning. Many traditional investment firms are still managing using spreadsheets and legacy software for their books. The changing regulatory environment and rising demand for transparency from investors also plays to the strengths of new providers — fintechs are agile in updating processes quickly.

OUTLOOK for the sector

Compared to traditional markets, alternative investments enable new options for investors of all sizes and risk appetites. More and more financial advisors are recommending these programs for uncorrelated, risk-adjusted returns in client portfolios. Investors enjoy impactful benefits such as lower minimums, faster onboarding processes, and seamless admin controls.

As these alternative providers gain investors, look for an expanded scope of portfolio options for investors and a deeper level of financial services functionality (deposit accounts, payments access, credit based on investments). This increases the ‘stickiness’ of funds within the fintech platform and boosts overall investor engagement.

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