In what may be one of its first investments in a Series A round, the investment firm KKR has pulled from its $98.6 billion in assets under management to lead a $15 million investment in fundraising platform Artivest.
The deal is part of a broader push from the private-equity firm to invest more actively in startup technology companies. To date, KKR has backed companies including Magic Leap, FanDuel, Ping Identity, Arago, ClickTale, Next Issue Media, and The Hut Group.
In the past, KKR invested primarily from a joint-venture fund it had set up with the venture investor Accel Partners, called Accel-KKR, but now the firm is also doing investments from its $13 billion balance sheet (a pool of capital larger than the top five largest current venture funds combined).
“Our balance sheet [investing] is very opportunistic,” said KKR CIO Ed Brandman. “I don’t think this is going to be a significant portion of the balance sheet [but] it can be meaningful. Over time [investments] could be hundreds of millions of dollars.”
With Artivest, there was a clear strategic benefit for KKR’s involvement. The company has created a technology and investment structure that allows accredited investors and the registered investment advisers that manage their money to invest in the private equity funds and hedge funds that had previously been the purview for ultra-high-net-worth individuals.
The problem for private-equity firms and hedge funds is that they don’t have the capacity to manage a relationship with thousands of individual investors — the documentation alone would be a nightmare.
Artivest solves this problem by creating investment funds that it manages, pooling the assets of the individual investors into a single, special-purpose vehicle that will invest in a private-equity or hedge fund.
It’s a variation on the marketplace theme that has enabled companies like AgFunder, CircleUp, AngelList, OurCrowd and others to take a page from the private investment playbook and create investment opportunities for qualified investors to act as their own micro-venture capital and private-equity shops.
A solicitation from Artivest works like this. The firm reaches out to top-tier private-equity firms (including KKR with whom the company worked on raising capital for a fund) and gets all of the relevant information about a fund. That information is then synopsized on a secure web page where investment advisers and individuals on the platform can visit to evaluate the opportunity.
If the investors are persuaded by the thesis, they can commit capital to a fund managed by Artivest that will then commit a large pool of capital to the private-equity firm.
Artivest makes money through placement fees with the funds it backs and management fees for the special funds it manages for its wealthy clients.
Its vision for expanding the pool of investible capital was persuasive enough for Peter Thiel, Nyca Partners, Anthemis Group and FinTech Collective to invest in a seed round for the company. And all of the investors are continuing to participate in the company’s $15 million Series A round.
A combination of factors are driving high-net-worth individuals into the arms of relatively illiquid private-equity and hedge fund investments (called alternative investment strategies), according to Artivest’s chief executive, James Waldinger.
“We have a near zero interest rate environment and unsteady markets. [Investors] are looking at alternatives as something that’s uncorrelated to public markets, as well as an area where they’ve seen tremendous returns,” Waldinger said.
The amount of money that the filthy rich around the world are looking to commit to alternatives is staggering. Roughly $2.7 trillion in new commitments could come from investors looking to invest in funds managed by private equity firms and hedge funds.
$2.7 trillion is an almost unfathomably large amount of money, but KKR’s Brandman, who will be taking a seat on the Artivest board, says that the industry can absorb all of that cash.
“You’re seeing larger pools of capital being raised for energy and real estate,” Brandman says. And opportunities abound for new investments in infrastructure, healthcare and in emerging economies in places like Africa and Southeast Asia, according to Brandman.
It’s also important to note, according to Brandman, that these investment opportunities are still not for everyone who may want to invest in a private-equity fund (lord knows I would if I could).
“These are people with $5 million in assets,” said Brandman. “Private equity is long-dated capital and… we’re not looking to bring the level down so dramatically that everyone who invests in an online brokerage platform can invest in a private-equity fund.”
Waldinger, a former hedge fund manager at Thiel’s hedge fund, Clarium Capital, agrees. “We’re disrupting the high costs, and friction and moving pieces that make it hard for the wider fund world to scale to this high-net-worth retail audience.”